Every parent wants to make sure their children are provided for in the event something happens to them while the children are still minors. Grandparents, aunts, uncles and other relatives often want to leave some of their assets to young children, too. But good intentions and poor planning often have unintended results.
For example, many parents think if they name a guardian for their minor children in their wills and something happens to them, the named person will automatically be able to use the inheritance to take care of the children. But that’s not what happens. When the will is probated, the court will appoint a guardian to raise the child; usually this is the person named by the parents. But the court, not the guardian, will control the inheritance until the child reaches legal age (18 or 21). At that time, the child will receive the entire inheritance. Most parents would prefer that their children inherit at a later age, but with a simple will, you have no choice; once the child reaches the age of majority, the court must distribute the entire inheritance in one lump sum. I like to call this “The Ferrari Syndrome”. A child who has not had the chance to understand how hard it is to accumulate wealth will be tempted to treat their inheritance as “found money”.[1]
Quite often children inherit money, real estate, stocks, CDs and other investments from grandparents and other relatives. If the child is still a minor when this person dies, the court will usually get involved, especially if the inheritance is significant. That’s because minor children can be on a title, but they cannot conduct business in their own names. So, as soon as the owner’s signature is required to sell, refinance, or transact other business, the court will have to get involved to protect the child’s interests.
Sometimes a custodial account is established for a minor child under the Uniform Transfer to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA). These are usually established through a bank and a custodian is named to manage the funds. But if the amount is significant (say, $10,000 or more), court approval may be required. In any event, the child will still receive the full amount when they turn 18.[2]
Another option is to set up a children’s trust in a will. This would let you name someone to manage the inheritance instead of the court. You can also decide when the children will inherit. But the trust cannot be funded until the will has been probated, and that can take precious time and could reduce the assets. If you become incapacitated, this trust does not go into effect…because your will cannot go into effect until after you die.
A better option is a revocable living trust, the preferred option for many parents and grandparents. The person(s) you select to manage the money (not the court) will be able to manage the inheritance for your minor children or grandchildren until they reach the age(s) you want them to take over responsibility for managing the assets—even if you become incapacitated. Each child’s needs and circumstances can be accommodated, according to your instructions. Assets which remain in the trust can also be protected from the courts, irresponsible spending and creditors (even divorce proceedings) with just a little extra planning.