What Does It Mean to be Named as Custodian?
What is a Custodian of an Estate? A Custodian holds a minor beneficiary’s inheritance until they are old enough to receive it directly.
Your friend, a loved one or family member has created their revocable living trust. They’ve just named you as a custodian for a gift left to a minor or young adult. Now what? What do you do? What does that mean?
There is also the possibility that if you were named as an alternate custodian. What does that mean? What do you do? This means you will be asked to serve only if the person named as legal custodian is unable to, or declines to serve.
What is a Revocable Living Trust?
A living trust is a separate legal entity that takes legal ownership of property that belongs to someone who created the trust agreement. Unlike a will, a living trust passes property outside of probate court. There are no court or attorney fees after the trust is established except if the successor trustee wishes to get legal counsel opinion. Your property can be passed immediately and directly to your named beneficiaries. In a simple trust, the person who created the trust is usually the person who will manage the property during their lifetime in the same way or any way they wish before and after the trust was created.
If you become incapacitated, the successor trustee can step in easily and manage your affairs. Or, when you die, the successor trustee takes over immediately without the need to get court approval. A trust usually has two types of beneficiaries – one (creator/s) that receives income from the trust during their lives and another type of beneficiary is one that receives whatever is left over after the first one (creator/s) dies. Unfortunately, you cannot use your living trust to name a guardian or guardians for your young children. If the trust contains instructions to give money or property to a beneficiary that has not reached the legal age of majority, it may also name an adult to act as the “Custodian,” who will be responsible for managing the minor’s inheritance until they are old enough to receive it directly.
What is a Custodian of an Estate? What is a Custodian?
In the trust document, you name someone to serve as custodian for a particular beneficiary. That person manages any trust property the young beneficiary inherits until the beneficiary reaches the age at which state law says the custodianship must end. A Custodian may be named for two reasons:
(a)Minors are legally prohibited from owning valuable property by law;
(b)Minors may be financially irresponsible, and could spend their inheritance irresponsibly.
The UTMA allows the donor to name a custodian, who has the fiduciary duty to manage and invest the property on behalf of the minor until that minor becomes of legal age. The property belongs to the minor from the time the property is gifted. If the donor dies while serving as custodian, the value of the custodianship property is included in the donor’s estate.
What is a Custodian of an Estate? What does a Custodian Do?
Custodians are responsible for managing the minor beneficiary’s inheritance and using it as appropriate to support the beneficiary’s health, and education.
What Is the Uniform Transfers to Minors Act (UTMA)?
The term Uniform Transfers to Minors Act (UTMA) refers to a law that allows a minor to receive gifts without the aid of a guardian or trustee. Gifts can include money, patents, royalties, real estate, and fine art. A UTMA account allows the gift giver or an appointed custodian to manage the minor’s account until the latter is of age. It also shields the minor from tax consequences on the gifts, up to a specified value. The UTMA also allows the Grantor to specify the age – between 18 and 25 years old – that the minor beneficiary must attain before they are allowed to hold the inheritance directly. This target age will be specified in the “Declaration of Trust” document. When the beneficiary reaches the target age, the Custodian turns over whatever remains of the inheritance to the beneficiary and the Custodianship ends.
What is a Custodian of an Estate? What are a Custodian’s Duties Under the UTMA?
A custodian has roughly the same responsibility as the trustee of a child’s sub-trust: to manage the beneficiary’s property wisely and honestly. The custodian’s authority and duties are set out by state law (the Uniform Transfers to Minors Act, as enacted by your state). No court directly supervises the custodian.
The custodian must:
- manage the property until the beneficiary reaches the age at which, by law, he or she gets the property outright
- use the property or income to pay for expenses such as the young beneficiary’s support, education and health care
- keep the property separate from his or her own property, and
- keep separate records of transactions. The custodian does not have to file a separate income tax return; income from the property can be reported on the young beneficiary’s return. (By comparison, the trustee of a child’s sub-trust must file a separate tax return for the sub-trust.)
A custodian who needs to hire an accountant, tax lawyer or other expert can use the property to pay for the help. It must to a reasonable amount.
If state law allows it, the custodian is entitled to reasonable compensation and reimbursement for reasonable expenses. The payment, if any is taken, comes from the custodial property.
For management under the UTMA –
The age at which management terminates is seldom an issue. In all but a few states, the management terminates automatically at age 18 or 21. In some states, it can last until age 25. You may select any age up to 35 for the management to end. Choosing the age a beneficiary should get whatever trust property has not been spent on the beneficiary’s needs, will depend on:
- the amount of money or other property involved
- how much control you would like to impose over it
- the beneficiary’s likely level of maturity as a young adult (for small children, this may be difficult to predict, but by the time youngsters reach their teens, you should have a pretty good indication), and
- whether the property you leave, such as rental property or a small business, needs sophisticated management that a young beneficiary is unlikely to master.
What is a Custodian of an Estate? Do I have to serve as Custodian?
Does being nominated mean you are obligated you to serve? You can decide, when the time comes, whether to accept this responsibility or not. If you choose to decline, an alternate Custodian named in the trust can take over. If no alternate is available, the Grantor’s Declaration of Trust may specify how a suitable Custodian shall be appointed.
