When an adult inherits money, there is often freedom in how they can use it, unless specified otherwise through a will or estate plan. However, when a minor inherits money, it must be managed through a trust account because they are deemed too young to manage it by themselves.
While this is a common method of estate planning, it can also create complications for the person managing the trust. Take Caroline, for example. Her sister passed away and left $100,000 in a trust for her 12-year-old nephew, and she has been named as the trustee. The money will go directly to her nephew Kyle when he turns 26, but in the meantime, she has to manage the funds in a way that she finds appropriate for her nephew. She’s also responsible for managing any legal issues.
Here’s what she can do with the money in this situation and what, if anything, she needs to know about taxes.
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How to manage a trust account
One of Caroline’s first responsibilities as a trustee is to make sure she complies with IRS rules. If the trust is a new one that’s just been created upon her sister’s death, she’s going to need to apply with the IRS for an employee identification number (EIN) to open a bank account for the trust [1]. This can be applied for online at IRS.gov.
Once she has the EIN, she can open a trust account where the inheritance will be deposited. This account could be set up at a:
- Bank or credit union: Good for simple savings accounts or CDs if she wants very safe, stable growth and easy access for expenses.
- Brokerage firm: Offers access to investments like mutual funds, ETFs or bonds, which may help the money grow over the 14 years before her nephew receives it.
The key thing to know is that anyone who is a trustee has a fiduciary duty [2]. This means Caroline must, at all times, use the money in her nephew’s best interest and not use it to benefit herself.
In some cases, a trust will contain specific instructions regarding what it can be used for. If that’s the case, you must follow those instructions. For example, if Caroline’s sister said the money should be used for education or medical expenses only, it would have to be used for those things only.
If there are no specific instructions, it’s up to the trustee to make sure they are using it as wisely as they can. She can decide whether to use the money for things like private school tuition, extracurricular activities, or health care expenses while her nephew grows up. She can also invest the funds to give him a larger nest egg at age 26.
This balancing act is critical. On one hand, she’ll want to make sure the trust can cover any meaningful opportunities or needs her nephew has now. On the other hand, she needs to preserve and ideally grow the money so that when Kyle turns 26, he’s set up for a strong start to adulthood. That may mean opting for relatively safe investments that can generate returns while minimizing risk, and carefully budgeting so withdrawals don’t deplete the account early.
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Managing the taxes associated with a trust account
Trusts don’t escape taxes. Here are the basics Caroline needs to know:
- When taxes apply: Taxes are typically owed if the trust earns income, such as interest, dividends, or capital gains from investments. If the money just sits in cash, there may be little to no tax liability.
- What forms are required: If the trust earns $600 or more in a year, Caroline must file IRS Form 1041, the U.S. Income Tax Return for Estates and Trusts.
- Who pays the taxes: Taxes are usually paid out of the trust account itself — not out of Caroline’s personal pocket. The fees or taxes reduce the balance of the trust.
- Distributions to the nephew: If Caroline uses trust money to pay for her nephew’s needs or gives him funds directly, that money may be taxed at his personal income tax rate. Since minors typically have little or no other income, that rate is usually low.
In short, trusts are only taxed if they earn returns — and how much depends on whether the money stays in the trust or is paid out. If it stays inside, the trust itself owes taxes. If it’s paid out, Kyle may owe taxes on what he receives, but often at a much lower rate.
Why having an estate planning attorney matters
Being a trustee is a serious legal responsibility. Mismanaging the funds, even unintentionally, can create liability. That’s why it’s smart for Caroline, or anyone in this role, to consult an estate planning attorney.
An attorney can clarify what counts as acting in the nephew’s “best interest,” explain the tax rules in detail, and help Caroline set up an investment or distribution plan that balances short-term support with long-term growth. They can also make sure she avoids missteps that could lead to penalties or family disputes.
At the end of the day, managing $100,000 for more than a decade isn’t just about safeguarding money, it’s about helping a child grow into adulthood with opportunities, stability and financial security.
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[1]. Thompson Law PLC. "Obtaining an EIN for Trusts and Estates"
[2]. Cornell Law. "Fiduciary duties of trustees"
This article originally appeared on Moneywise.com under the title: My sister died, leaving me as trustee for my 12-year-old nephew’s $100,000 inheritance — what do I need to do?
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