I'm trustee of $65,000 going to my nephew. What are the rules for what I can do with the money?

Yahoo

31-07-2025

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I am the trustee of a young relative's inheritance from my father's estate, which includes a provision for $50,000 to be distributed from a trust, which goes into another trust formed to receive it. The new trust is to last until my nephew turns 25, after which the funds are to be turned over to him, barring any issues with creditors or substance abuse. The terms of the trust are generous and give me great latitude in spending the money for the benefit of the young relative. Another $15,000 is in a brokerage account that will need to transfer somewhere. A custodial account? The same trust account?
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The relative also has a 529 account with $14,000 in it, of which I am the custodian, but the young relative is still a couple of years away from college decisions.
What am I to do with all of this? My father's trust was structured so that any taxable income in the trust was passed through to his personal income-tax return, and so avoided higher taxes that trusts may incur. For the new trust, who pays the tax? Will it pass through to the young relative?
Would I be able to continue funding the current 529 from the trust or would I have to set up a new 529? Who would then get the credit on their tax return? Also, once the young relative has a job, I would like the trust to fund a Roth IRA on their behalf, and I would encourage them to keep it funded indefinitely. And how should I approach communicating all of this to the relative and their parents?
The Trustee
You've got a big job ahead of you, but it looks like you're taking it very seriously and approaching it with love. Your young relative is lucky to have a steady hand steering their financial future.
You've asked a few questions here, but they mostly come down to what you are 'supposed' to do to fulfill the wishes of your father and what you are legally allowed to do as a trustee for a minor.
If your father didn't spell out any specific wishes in the trust language, you'd have to rely on what he told you himself or generally how he managed his life. It seems like his grandchild was very important to him and he wanted the child to get a good education and learn enough to manage their own affairs by the time they turned 25 and the funds became theirs. Perhaps the best thing you could do for the child is teach them what you know about money and responsibility so they are ready to handle the funds on their own when it's time.
As for what you're allowed to do, let's break that down.
As the trust provided for a new trust to be created upon your father's death, you would create a tax identification number to correspond to that trust. You could then use that to open a trust account to hold the assets, including the $50,000 distribution and the $15,000 in the brokerage.
If there's growth in the account, the trust would owe taxes. As trustee, you'd be responsible for filing the correct IRS forms each year if the trust income is over the filing threshold, which is generally $600. The trust itself would pay the tax if there were no distributions, and would pay trust income-tax rates, which are higher than individual rates. If you give money to the beneficiary in a given year, then the tax burden passes through to them.
'Strictly from a tax point of view, making a distribution to a beneficiary who is a minor would mean they are most likely in a much lower tax bracket,' said Jere Doyle, estate planning strategist for BNY Wealth. 'What people should realize is that income-tax rates for trusts are extremely compact. Once you get over $15,600 of taxable income, they are 37%. If you were married and filing jointly, you'd have to have over $750,000 in income for that tax rate.'
The trust could continue to make 529 contributions to the existing account, most likely, but the deduction would be up to the rules of the state. New York, for instance, gives a state tax deduction for contributions, and the trust could claim that on a state trust income-tax return against any income. 'Trusts are governed by the same tax rules as individuals,' said Doyle.
For the trust to be the owner of the account rather than you as an individual as custodian, the trust should have special provisions that authorize the trustee to hold the 529 plan and make distributions for qualified expenses, Doyle explained.
Making Roth IRA contributions on behalf of the minor — or once the child becomes an adult — is more complicated. For one thing, to make a Roth IRA contribution as a minor or adult, you need earned income. Trust income would not count toward that. So once the child has a job, a custodian would be able to open a Roth IRA for minors — this could be you, as trustee or a parent. At the age of majority, which is 18 in most instances, the account would roll over to the young person's control.
To make contributions to this account, you'd most likely need to make a distribution in cash from the trust and then put the money in the minor's Roth IRA account. After the beneficiary is a legal adult, this might mean handing them a check to make the deposit on their own. You could tell them you intend it for retirement, but once you hand over the money, you have little control. 'They can go have a good time with the money,' said Doyle.
Which brings us back to point one. Your main job as trustee is to ensure good stewardship of the inheritance as a fiduciary. That's not just about picking good investments and keeping track of paperwork. You also need to think about the person you're protecting and what's best for them, and that means making sure they are ready for the responsibility that comes with managing money. Teach first, distribute later.
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