Virtual Representation for Minor Children and Other Beneficiaries

Virtual Representation for Minor Children and Other Beneficiaries

Cut the red tape and keep the trust in the black

The power of parenthood has its limits.  After years of signing waivers for all kinds of activities, parents often are surprised to learn that they don’t automatically have the power to sign waivers for their minor children when it comes to trusts and estates. Children’s interests in trusts and estates are outside their parents’ control because these interests are financial.  Generally, laws are designed to protect children’s financial interests from everyone, even their own parents.  If a parent or other competent adult can’t sign for the minor child, a court-appointed guardian or conservator may be needed.

In fact, the default rule for children is that only a court-appointed guardian or conservator can make a binding financial decision.  This would be a huge burden if there were no exceptions because guardianships and conservatorships are court proceedings.  Significant work and expense is often required to obtain a judgment appointing a guardian or conservator.  Once the appointment is made, the guardian or conservator often must meet annual reporting requirements and related filing fees. 

Fortunately, a concept called “virtual representation” may help avoid these problems. Virtual representation laws create a new system to protect minor and incompetent beneficiaries as well as fiduciaries, while simplifying trust administration.

 

UTMA and UGMA

Because guardianship and conservatorship proceedings can be burdensome and costly, over time, laws have been enacted to allow exceptions so that assets can be held for minor children.  One common exception is a Uniform Transfers to Minors Act   (UTMA) or Uniform Gifts to Minors Act (UGMA) account.”  State law allows and regulates these accounts. They empower a custodian to hold funds for a child’s benefit until the child reaches a certain age (usually 18 or 21, depending on state law).  Without UTMA and UGMA, any bank account for a child would have to be managed by a court-appointed guardian or conservator.  These statutes provide a limited solution to avoid unnecessary guardianship and conservatorship.

 

Need for Guardian or Conservator

In some states, there’s no similar statutory solution to avoid guardianships and conservatorships for minor beneficiaries of trusts.  There, if minor children can benefit from a trust and the trust isn’t drafted to avoid this result, guardians or conservators must be appointed to speak for the minors.  The trustee or executor gives all notifications and accountings to the guardian or conservator.  The guardian or conservator can approve the trustee’s actions and release the trustee from liability. Everything the guardian or conservator does is binding on the minor child, and the court oversees the whole process.  This arrangement is very protective for children and for trustees, but it can drain trust resources.

If no guardian or conservator were appointed to represent a minor beneficiary of a trust, then the trustee would be unable to give notifications to the minor child or bereleased from liability.  The trustee would remain exposed to liability until after the child reached the age of majority.  As a general rule, the statute of limitations for actions against the trustee wouldn’t begin to run until that time.  It’s a long time to wait for peace of mind.

 

Virtual Representation Laws

The good news is that the Uniform Trust Code (UTC) and many other modern trust laws include provisions to allow competent adults to speak for minor trust beneficiaries.  This concept is called “virtual representation.” Although the specifics vary from state to state, the concept of virtual representation is the same.  Virtual representation provisions empower competent adults to speak for beneficiaries who lack the legal capacity to speak for themselves.  Beneficiaries who may be represented may include minor children, incapacitated adults, unborn children, unascertained beneficiaries and adult beneficiaries who can’t be located.  None of these individuals would be able to legally receive notice or assent to a trustee’s actions. These individuals may be represented by a competent adult beneficiary of the same trust, a parent or an attorney-in-fact, depending on the circumstances.  There’s one important caveat: The competent adult must not have a conflict of interest with the person being represented.

Because the provisions of a trust govern its administration, an attorney may draft a trust to include virtual representation provisions that are broader than the applicable state law.  While this may give the trustee some flexibility in administration, enforcement ultimately would be up to the state courts.  In the case of a challenge by a beneficiary, the courts would have to decide whether to enforce the trust’s broad virtual representation provisions.

If a trustee would like to use virtual representation to bind minor beneficiaries, as a best practice, the trustee should obtain assents from an entire class of competent adult beneficiaries.  This helps to confirm that the action is generally agreeable and not controversial, and it provides back-up in case a conflict of interest is later identified between certain beneficiaries.  Also, any documentation regarding the virtual representation should clearly identify who’s taking the action and who will be bound by it.

In addition to the virtual representation provisions in the UTC, there are virtual representation provisions in the Uniform Probate Code (UPC), applying to probate estates.  These provisions are more limited, but when they do apply, they help to simplify probate administration.  Specifically, the UPC permits a parent to represent a minor child if no conservator or guardian has been appointed and there’s no conflict of interest between the parent and the child.  For example, if the child will receive a specific cash gift and there’s easily enough cash in the estate to pay the gift, there may be no conflict of interest between the parent and the child, even if the parent is also a beneficiary.

As it turns out, under certain circumstances, virtual representation allows a parent to sign waivers for a child’s interest in a trust or estate.  When virtual representation is available, it provides an intuitive solution to simplify trust and estate administration.

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