Section 1301 Trusts Can Help Minors
In many cases, the court’s creation of an estate’s guardianship for an incapacitated individual or a minor may be inevitable. It may be the least restrictive option for the court. However, I am often approached by clients for whom there are lesser-restrictive and more efficient mechanisms or processes that can achieve many of the same goals.
When faced with the situation that a minor child is supposed to inherit some money from a parent or grandparent, the courts cannot allow the minor to receive the property outright. Likewise, the law does not allow a parent to collect the money on their behalf without some formal procedure like a guardianship.
Take, for example, a father’s $50,000 life insurance policy naming his minor child as the sole beneficiary. The surviving parent wants to collect the funds owed to the child to be used for the ordinary expenses of raising the minor, or perhaps the funds will be tucked away for college. In either event, the mother wants to collect the funds, and the insurance company wants to pay them but cannot pay the minor child directly. As par for the course, the insurer usually demands that a guardianship be created. They don’t want to be liable to the child by delivering the funds to the mother without security that the mother will be accountable for the funds. Guardianship of the minor’s estate seems like the best choice, if not the only one. But is it?
As with most attorney answers – it depends. The mother could request that the court appoint her as the guardian of the minor’s estate. But this choice often comes with some significant downside. The mother would need to post a bond for the policy proceeds, and the proceeds will be reduced by the fees and expenses of creating the guardianship. Moreover, the guardianship must be maintained, which means that additional expenses will be incurred annually until the child turns 18. Again, the proceeds would be reduced, sometimes significantly, over time. The overall process might be inefficient and challenging, if not impossible, under certain circumstances.
One alternative available to the mother might be a trust created by the court under Section 1301 of the Texas Estates Code. Under this law, a financial institution, and sometimes a person, can be appointed by the court to act as a Trustee of a trust created by the court for the minor’s benefit. The trust comes equipped with very specialized terms that permit the Trustee to collect the insurance proceeds and use them for the minor’s benefit until anywhere from the age of 18 to 25. Every year, the Trustee reports to the court and accounts for the trust’s activities.
Often, such an alternative can be achieved relatively quickly and at a significantly lower cost. The insurance company is happy to pay a bank or person who will be accountable for the funds, and the mother is happy that the funds will be available for the same purpose for which the deceased father intended them.
Section 1301 Trusts are not only available to minors, but they are also available for managing assets for an incapacitated person. In many instances, having a bank manage the assets may be preferred over having a family member or other individual manage them. In those cases, the 1301 Trusts are advantageous.
Sometimes, guardianship is not just the best choice, but the only one. But, alternatives such as the Section 1301 Trusts are prime examples of the legislature working for our citizens to provide reasoned answers to questions and issues that affect more people every day. In the areas of guardianship and probate, there may be many achievable alternatives that provide the same, if not better, results for the client, at a lower cost and with greater overall benefit.