You’ve thought long and hard about who will take on guardianship of your minor children in the event of your death, and you want to make sure that a) this trusted friend or family member has enough money to cover the costs of raising them and b) your kids will have the funds to eventually pay educational costs and/or get their adult lives started.
The truth is, the process knowing how to distribute your assets is overwhelming, so we’re here to help with 6 things you should know about leaving money and assets to minor children.
1. The first, and potentially most important, thing to do is make sure the children are named as beneficiaries on all the accounts you wish to bequeath to them.
This includes life insurance policies, investment accounts, mutual funds, savings accounts...literally every financial asset you want them to have. (If you're married, they will likely be contingent beneficiaries after your spouse, especially on retirement accounts.)
If you miss this step, distribution of your assets will likely get held up in probate court, even if you have a legal last will and testament in place. This will delay the ability of their guardians to use the money to care for your kids.
2. If you decide to keep it really basic, you can simply name a ‘property guardian’ in your will.
This person, who may or may not be the same person appointed to the position of physical guardian, will be appointed by the court to take on the responsibility of managing your kids’ inherited assets until they reach the “age of majority,” which is 18 in all but three states (it is 19 in Alabama and Nebraska and 21 in Mississippi).
If your estate is significant, however, your state's probate court may require a conservator to manage your child's assets, a role that requires much more paperwork and oversight. (It's interesting to note that in some states, an older child may be given the opportunity to tell the court who they want to manage their assets.)
The big downside here is that without additional provisions in place, remaining funds will be distributed to your kids in one lump sum when they hit this age-18 milestone. Imagine a high school senior receiving a check for the entire value of your estate, along with the authority to do whatever they want with that money. That thought may make you wince. However, if your assets are minimal and you're confident your child can handle it, this could be the most efficient and hassle-free route to take.
3. consider naming a custodian in your will and setting up an account through the Uniform Transfer to Minors Act (the UTMA is valid in all states except South Carolina).
A custodian differs from a guardian in that they manage assets while a guardian oversees the day-to-day welfare of a child. Instructions for the custodian can be listed in your will, and the money can be used for anything that will benefit the child: braces, guitar lessons, private school, summer camp, you name it.
This could be the way to go for those who have assets but want to avoid the expense and complications of a trust. Regulations about ages, values, and distributions vary by state, however, so be sure to check the rules for yours before making any decisions.
Side note: UTMA accounts (and their cousins, UGMAs) are often considered handy ways for grandparents and other relatives/friends to provide financial gifts to minors. Be aware, though, that the money sitting in these accounts is taxable.
4. Trusts are excellent options for many people, albeit more complicated and more expensive to establish.
You can either set up individual trusts for each child, or a “group trust” for all of them. In short, you name a trustee and — just like a custodian — that person is responsible for managing and appropriately distributing the money you leave behind based on your written instructions.
One of the biggest benefits of a trust is that it gives you the ability to spell out certain requirements and provisions that must be met in order for your kids to receive their money.
For example, you can specify when they take control of their inheritance, and you can release it in stages if you so choose (a certain amount at 21, the rest 30, etc.).
You can also keep the money out of the hands of unscrupulous third parties, and may be able to shelter it from any legal issues your offspring might find themselves involved in (divorce, lawsuits) later on in life.
The downside? There's extra work for the trustee in the form of … taxes. Yep, a trust fund is a taxable entity, so your trustee will need to file tax returns on behalf of the trust each year.
5. And how about incentive trusts?
An incentive trust requires the child to meet certain criteria in order to receive an inheritance. Typically, this is along the lines of, “You must obtain a college degree” or “You must get accepted to law school.”
And while it might seem like a good way to encourage your kids to make responsible decisions, incentive trusts require a higher level of involvement from the trustee, and sometimes they bring up questions that weren’t answered in the will (e.g. does graduating from culinary school or a dental hygiene program count as ‘college'? Does your criteria give one child an unfair advantage over another child?)
So, before you put an incentive trust in place, think long and hard about the ramifications and be prepared to spell everything out very clearly.
6. Finally, don’t be shy about asking for assistance with this process.
We recommend seeking guidance from an expert, such as an estate planning attorney and/or financial advisor. These professionals can help spot the little details you might miss and put together an estate plan that works best for you and your family, whether your assets are sizable, humble, or somewhere in between.
By the way, even modest estates can benefit from professional advice. Setting up your estate correctly can leave even more money and assets for your children instead of going toward probate and legal fees after your death.
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