At its core, estate planning is setting the terms upon which assets are transitioned from a person, often a parent, to another such as a child. Without proper estate planning creating trusts for children, a parent’s assets become available to the child immediately if at the parent’s death: (a) the parent was not married to the child’s other parent and (b) the child is over the age of 18. Money can be a powerful tool. It also can be abused or squandered. Most would agree that even a modest sum of money would be better served by holding back the money instead of transferring it to a child who may not have even finished high school. This article explores trusts as a vehicle to transfer money to a child.

Uniform Transfers to Minors Act Accounts.

The simplest form of trusts for children is a custodial account under Arizona’s Uniform Transfers to Minors Act (UTMA), which permits a fiduciary to transfer money payable to a minor to an account in their name and the name of the custodian. The UTMA account has standard statutory restrictions on how the money can be withdrawn and used before the child turns 18. This is a great solution if the child inherits less than $10,000, or more with court approval, as it eliminates the need to incur administrative costs such as, expenses for drafting the trust terms and the preparation of annual court accountings, which are not required unless requested by the minor. Unfortunately, UTMA accounts are transferred to the child upon attaining the age of 18.

Guardianships and Conservatorships.

Another form of statutory trusts for children is a guardianship or conservatorship created by the Probate Court under Arizona law. Similar to UTMA Accounts, the probate laws have statutory restrictions on how the assets can be withdrawn or used and the assets must be transferred to the child at age 18, making their terms inflexible. In addition, these laws require the preparation and filing of annual accountings to the court, making them administratively expensive to administer.


The last type of structure for giving assets to a child is a trust created by the parent. Trusts for children are drafted into a will or trust instrument if the assets are larger and the parent desires to avoid the probate process, restrict the child’s access to the funds beyond age 18, protect the assets from claims by third party creditors or the child’s spouse and potentially control who will receive the assets of the trust upon the child’s death. Trusts for children drafted into a will instrument require the assets to go through the probate process upon the death of the testator/testatrix.  Probating the will is not as cumbersome or expensive as the guardianship or conservatorship structures created by law, but the process can be administratively costly and time consuming. Therefore, we usually recommend that trusts for children be created in a separate instrument to avoid the probate process.  Unlike the UTMA account, guardianship or conservatorship, the terms of trusts for children are very flexible and can be tailored to address each family’s situation and objectives. In preparing a trusts for children the parents should consider the following issues: (a) who should be the trustee, (b) when, if ever, does the child have a right to remove the assets from the trust, (c) what type of distributions does the child receive during the term of the trust and (d) who are the remainder beneficiaries if the child dies before the final distribution date?

1. Who should be the Trustee of trusts for children?

Once you have made the decision to place the assets in trust for a child, the most important question to answer is going to be who is named the initial trustee. Much goes into this discussion, but alternatives include:

a. The child may be the trustee in certain instances. This happens when the parent is comfortable with the child’s financial knowledge and discipline, but wants to put a wrapper on the trust assets to protect them from third party creditors and divorce.

b. Friends and family members are good choices as trustee for small trusts when the trust will terminate in a relatively short timeframe (2-5 years). Friends and family members usually do not charge a fee, have a basis of respect and confidence with the child and can sometimes be more flexible as they are not constrained by corporate bureaucracies. We are often asked to name two family members, so the interests of both sides of a family are represented. In this case naming co-trustees just magnifies the problems, as the individual co-trustees may see the issues differently, and the parent should look to other alternatives.

c. Corporate trustees, such as banks and trust companies are excellent candidates to be the trustee. Corporate trustees work better if the assets are large or complex, the term of the trust will last for many years or even generations, or the other trustee alternatives are not available for one reason or another. In these circumstances, having a professional serve as trustee makes better sense, albeit with a fee. Corporate trustees have experience dealing with the variety of issues that come up during administration, are more objective and are better able balance the interests of beneficiaries with differing rights in the trust. Once the decision is made to select a corporate trustee, the decision then turns to which one. There are three types of corporate trustees (i) banks that offer fiduciary services, (ii) full-service trust companies and (iii) administrative trust companies, which delegate investment management to a third-party.  For more on when and how to delegate management responsibility see our post on Delegation of Trustee Powers. In selecting the right corporate trustee, the parent must look at the trust’s purpose and terms, its potential asset mix (whether the trust holds large privately held entities, real estate holdings or other risky assets), and whether the parent desires their current financial relationships to continue to manage the assets.
Selecting the right trustee can be difficult, but there are solutions to fit most needs.

2. When is the child able to withdraw the assets of the trust?

Probably the most fluid part of estate planning with many nuances and alternatives, the answer to the question of when can the child withdraw the trust’s assets depends a lot on the parent’s purpose for creating the trust and the parent’s philosophy of money. Some parents believe that once they are deceased, the child should have broad discretion to use the money with restriction. In that case, we usually recommend that child be able to withdraw the assets at age 22 or 25, just to get the child through college or trade school with some supervision. Other parents are more protective and want the child to reach the illusive “age of reason” before the assets of the trust may be withdrawn. In this case, spreading out the rights of withdrawals over the child’s life assists the child with additional expenses related to marriage, housing and kids, to cover expenses related to career changes, business opportunities or their children’s college expenses and their own retirement planning. In this instance we may suggest withdrawal rights at certain ages or time periods, such as:

  • up to 20% at age 30, up to 50% at age 35 and the balance at age 40 or thereafter. This structure is very common with smaller estates as it gives the child time to mature, minimizes the damages associated with a bad business decision or failed marriage and hopefully educates the child on the power of investing.
  • up to 30% in the child’s thirties, up to 60 % in the child’s forties and up to 100% in the child’s fifties.
  • up to 5% of the principal each year, commonly referred to as a “Five and Five Power” grants the child the right to withdrawal the greater of $5,000 or 5% of the trust principal. If the parent wanted to avoid the child depleting the assets of the trust over a long period of time, the percentage could be reduced to two or three percent or instead of an annual right, the right only occurs every two or five years, making it less likely the withdrawals and distributions would deplete the assets of the trust.

Lastly, where the parent desires to provide a legacy to several generations, the child may never have a right of withdrawal and would only receive income and principal distributions determined by the trustee. Any assets left in the trust at the child’s death will be distributed as determined by the parent and set forth in the instrument. See the discussion of distributions and remainder beneficiaries below.

Note that the parent may use a combination of the above approaches, so that one bucket of assets becomes immediately available to the child (such as retirement accounts, which have income tax obligations), another bucket of assets is set aside with restrictive terms to maximize generational giving without adverse tax consequences and a third bucket of assets has a broader set of terms allowing the child more withdrawal rights.

3. On what conditions may the trustee make distributions to the child?

Prior to withdrawal or complete distribution of the trust, the parent can dictate how income and principal of the trust may be used by the child. Spending some time understanding the possible discretionary standards, discussing them and appropriately drafting your desires is an important step in the creation of a trust for a child. Income distribution language generally falls into one of three alternatives.

  1. Under the mandatory income model, all the income generated by the trust must be distributed to the child. This is the traditional model, where the income is required to be distributed. The problem with this approach is that the income may exceed the child’s needs at any given time, but the trustee does not have the discretion to withhold the money. The distributed income will also be available to the child’s creditors. This approach requires the trustee to carefully manage the assets so that the appropriate amount of income is available to the child.
  2. The unitrust model gets away from the distinction between income and principal and simple states a flat percentage that must be distributed to the child, usually between three and five percent, depending on how long the parent desires the trust to last. This is a more modern approach, but again requires the trustee to make the distributions.
  3. Lastly, in the discretionary income model, the trustee has complete discretion whether to distribute the income generated by the trust’s assets to the child. The trustee’s discretion is usually subject to a distribution standard set forth in the instrument. A familiar discretionary standard used in trust instruments is to allow income distributions for the child’s “health, education, maintenance and support.” This distribution standard draws the line between what is included and excluded from the child’s estate for tax and creditor purposes. Of course, it can be narrowed (i.e., to just health or education) or broadened to specifically permit or require distributions at certain ages or for specific items such as automobiles, weddings, honeymoons, residences, businesses and professions. Parents can also include provisions which restrict discretionary income distributions if there are behavioral, creditor or substance abuse issues. The trust can even evolve, so that it may start out as discretionary, but then the income distributions become mandatory upon the child attaining a certain age. Or the trust may have different distribution standards for different sub-trusts for the child based on the tax attributes of the trust (i.e., whether the assets are subject to Generation Skipping Taxes). The possibilities are endless. Of course, the parent may also combine a few of the above approaches to meet their desires.

In addition to the income distributions, the parent may also forbid or authorize the trustee to distribute the trust principal to the child. Provisions authorizing the trustee to distribute the principal are usually subject to the same or a similar discretionary standard as income discussed above. The parent may also allow broader distributions of principal if the assets of the trust are over a certain minimum size, but then may be more restrictive if the trust principal does not exceed the minimum size. The more restrictive the language, the more the trust will benefit the remainder beneficiaries and the more permissive the language, the more the trust will benefit the child.
As an alternative to distributing assets, the parent may also specifically authorize loans to the child on preferential terms to allow the child to purchase real estate purchase or take advantage of other business opportunities.

4. Who are the remainder beneficiaries?

The last question to address when establishing a trust for a child is determining the persons or entities who are entitled to the assets of the trust upon the death of the child before the assets of the trust are withdrawn or completely distributed. A common answer is that the assets are held for the benefit of the child’s descendants (children, grandchildren, etc.) or the assets may be held for the parent’s descendants or other beneficiaries. If the parent has divided the assets among several unrelated beneficiaries, the parent also may want to dictate which remainder beneficiaries receive a particular beneficiary’s share. The parent may also grant the child a power of appointment, essentially allowing the child to select who receives the assets from a group beneficiaries permitted by the parent, such as one or more of the child’s spouse or descendants, a certain branch of family members or charitable beneficiaries. The answer to this question will depend on the parent’s desires and the amount of control the parent wants to assert in the ultimate distribution of the trust’s assets.

Drafting trusts for children is not difficult, but there are many variations which need to be discussed and addressed in the trust instrument.  As a quick summary of some of the more important decisions, you can download our chart here: Trustee and Distribution Standard Chart.