When a minor child inherits money from a deceased relative, or if they are awarded a sum of money from a personal injury or another settlement claim, there are a few methods to manage the money for the child. In Texas, a child under 18 cannot possess the inheritance or other settlement. Texas law provides several options for transferring money to benefit the child, such as a guardianship of the estate or a trust, specifically a Management Trust authorized by Texas Estates Code Section 1301.
In many cases, a 1301 management trust may be the most effective and logical option for the minor child because it is a less restrictive alternative to guardianship of the estate.
Texas Inheritance Laws For Minors
If a minor child inherits money or property in Texas, they may not receive it outright. Nor does Texas law permit the parent of the minor beneficiary to collect the money or property on behalf of their child without a formal procedure such as a guardianship of the estate or creating a 1301 management trust.
Take, for example, a mother purchasing a $250,000 life insurance policy and naming her minor child as the sole beneficiary. Her surviving spouse, the child’s father, may wish to use the life insurance money to help care for the child’s daily needs or to place the money in a savings account for college. The insurance company will pay the funds in the policy but cannot directly give that money to the child if they are under 18. The insurance company often recommends a legal structure – a guardianship of the estate – to transfer the money to the beneficiary. But a 1301 Management Trust is a special trust in Texas that provides the trustee a legal avenue to use the monies to take care of the child’s needs, pay for their education, or keep the funds intact and protected until the child reaches legal age.
How Management Trusts Benefit Minor Beneficiaries
Using the example above, the father may petition the court to create a trust as per Section 1301 of the Texas Estates Code. This legal entity is referred to as a Management Trust, or a 1301 trust, and provides the trustee with specific, specialized terms concerning a minor’s inheritance.
Under Texas law, a person or a financial institution can become appointed by a Texas civil court to act as a trustee on behalf of a minor, controlling inherited or awarded funds and property placed in a trust. The trustee may collect the insurance benefit and use the funds to benefit the minor until they reach anywhere from age 18 to 25. The trustee is responsible for submitting a report to the court each year documenting the trust’s activities (such as withdrawals to pay for the minor’s care, school tuition, or investments the trust makes).
A Management Trust is cost-effective and can be created fairly quickly, so the insurance company can immediately pay out the benefit. The trust sets forth an accountable party for the funds, which protects the insurance company from any possible litigation. The child’s surviving parent can access the funds to use on behalf of their child as their deceased mother intended them to be.
Section 1301 Management Trusts in Texas
A Section 1301 Trust isn’t just available to a minor; it may also be used to manage funds and assets on behalf of an incapacitated person. In many cases, it may be more beneficial for the incapacitated person to have a bank or other financial institution manage funds bequeathed to them instead of a friend or family member. A 1301 Trust facilitates this.
The beneficiary’s attorney ad litem may establish a 1301 trust on behalf of the individual. The trustee can distribute the trust to provide for a minor child’s needs and education or to care for the needs of an incapacitated adult.
Forming a 1301 Management Trust For a Minor Child
Experienced and professional estate planning attorneys can provide the insight and legal guidance to help establish a 1301 Management Trust for your minor child. Contact us today to get started.