Trusts for Minors

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The two easiest ways to transfer assets to a child are to open a custodial account for the child at a bank or brokerage or to bequeath the assets in your will. But both of those methods are inappropriate for substantial sums because they let the child have full control of the stash at the age of majority, generally 18 or 21, regardless of whether he or she is mature enough to handle the money. However, if you establish a minor's trust to hold a child's assets, you can keep the money under wraps beyond the child's 18th or 21st birthday and influence how the money is ultimately used.

Consider the trusts established by 67-year-old retired bank executive Wolfgang Schoellkopf of New York City. Motivated by memories of his struggle as a young man to raise a family, buy a house and pursue a career, Schoellkopf was determined to help his son and daughter-in-law. His solution: set up college funds for his grandchildren, Julie, 7, and Jason, 1. On the advice of his attorney, Cheryl Hader of New York City, Schoellkopf established a $20,000 minor's trust for Julie in 1997 and a $20,000 minor's trust for Jason in 1998. He appointed the children's uncle, who is a stockbroker, as trustee.

The trust documents dictate that the funds must be used to pay for tuition, books, room, board and other living expenses while Julie and Jason are attending a four-year college or university�and that each will receive $10,000 upon graduation. Whatever is left in the trusts goes to them at age 30. If either of them doesn't attend college or goes to a two-year junior college, she or he gets half of the money at 30 and the rest at 35.

A caveat: While minor's trusts let you hold on to hefty sums for a long time, they're not entirely leakproof. In exchange for tax breaks on your trust contributions, you must generally give the beneficiaries limited access to the trust principal. Schoellkopf's trusts, for example, include typical provisions that require the trustee to notify the children (through their parents) whenever Schoellkopf makes subsequent contributions to the trust; they then have 45 days from the date of notification to withdraw an amount equal to the contribution. In practice, however, most beneficiaries never demand the money, so the brief window of opportunity to tap the trust is generally considered a risk worth taking to qualify for tax advantages.