Leaving Inheritance to Minors
I wish it were simpler, but unfortunately, leaving an inheritance to minors is a bit complicated. This month’s blog post will walk you through the options.
What if I name the minor as beneficiary of my Will or beneficiary of my accounts?
In either of these cases, probate court would be involved. If there are probate assets (meaning assets owned only by you, so no joint with right of survivorship owner or beneficiary named) then they will be governed by the terms of your Will and subject to a probate process when you die. Then, a guardian would likely need to be appointed by probate court to access the funds for the minor until the minor reaches 18, at which time the minor would receive all the remaining funds.
If in your Will you appoint a custodian over the funds under the Transfers to Minors Act, then probate property, after passing through the probate court process, would be released to your chosen custodian for the minor child, so no guardianship would be necessary.
In short, if you name a minor as a beneficiary of an account or if a minor inherits probate property through your Will, some probate will be necessary. Further, if you name a minor as a direct beneficiary of an account or the account goes through probate (because there is no beneficiary or joint owner) and you have not named a custodian, then the minor child will receive the funds at 18.
But I want to avoid probate. How do I do that?
Instead of naming the minor as beneficiary of your account, you could name a custodian on the beneficiary form under the Transfers to Minors Act. For example, instead of naming Little Jimmy as beneficiary, you would name Big John, as custodian FBO Little Jimmy until age 23 under the UTMA. With a custodial designation, no probate would be necessary. Big John, who you chose and trust, would manage the funds for Little Jimmy until Little Jimmy reaches the age of 23, or whatever age that you choose as permitted by the state’s law. If Little Jimmy needed money prior to age 23, Big John could make distributions for him. This can be a great, low cost, probate avoidance option.
The one draw-back is that not all financial institutions will allow these designations. You would need to inquire with your financial institution as to whether they permit a custodial designation. If they don’t and you don’t want to move your assets to a financial institution who permits them, or if you want more control over how the funds will be used for Little Jimmy, or you want to extend the age of access for Little Jimmy beyond what is permitted under the Transfer to Minors Act where the financial institution is located, then you would consider having a Trust prepared.
How would it work if I have a trust prepared?
The trust would be the beneficiary of your assets, which would avoid probate. The trust agreement, which is basically an instruction manual for how the trust assets will be managed and distributed, would be prepared by your estate planning attorney. You would decide the terms of that instruction manual, ie. when the minors get the money, for what purposes can the funds be spent for the minor, etc. Because of income tax concerns, retirement accounts that funnel through the trust will typically be treated differently than non-taxable funds. That discussion is beyond the scope of this blog post, but a good conversation to have with your estate planning attorney, and something I may tackle in a future post.
