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Estate Plan Issues for Parents with Minor Children – Leaving an Inheritance to Minors

las law inheritance
Estate Plan Issues for Parents with Minor Children – Leaving an Inheritance to Minors

las law inheritanceMany of our clients have minor children or other minor beneficiaries (e.g., nieces, nephews, godchildren) that they include in their estate plan.   Our goal in advising these clients is to discuss the various ways that they can leave an inheritance to a minor child, along with the pros and cons of each method.

Beneficiary Designation

Many people try to avoid probate court after their death by naming their children as beneficiaries (sometimes called TODs or PODs) of their assets.  While assets with beneficiaries certainly avoid probate court for distribution purposes, there is a major problem with naming minors as beneficiaries.  By law, minors cannot own property in their own name without an adult managing the asset – usually with court supervision under what is called a conservatorship – until the child turns 18 years old.  Then, under a conservatorship, the child will have unfettered discretion over the remaining balance of the asset when they reach the age of 18.  No one or nothing stands in the way of them squandering their entire inheritance at this point.  Imagine you have a $1,000,000 life insurance policy.  If you name your child or children as beneficiaries of this asset and you die prematurely while your child is a minor, someone will have to go to probate court to open a conservatorship for this money.  The court-appointed conservator will have to provide annual reports to the court showing how any part of the asset was spent and will have to get the court’s pre-approval for certain expenditures.  And then when your child turns 18, he or she will get full access to the remaining balance of the $1,000,000.  Not good.  There is a better way.

Living Trust (a.k.a. Revocable Trust)

The Living Trust is the best way to transfer assets to your minor children upon your death.  When you create a Living Trust, you are creating a legal entity that can hold assets and that will distribute those assets upon your death according to the rules you set forth in the Trust document.  If you are married, you will likely create a Joint Living Trust (but please consult an attorney to discuss the differences between a joint and single trust).  If set-up correctly, all of your assets will funnel into the Trust when the surviving spouse dies, and the successor Trustee will step in to manage the assets.  You get to appoint your successor Trustees.  You can choose family, friends, financial planners, or attorneys.  You may select people to act as Co-Trustees, as well.  It is common for a married couple to select one person from each of their families to act as Co-Trustees, to ensure that both sides of the family are represented in making financial decisions for the children.

As the creator of your trust, you get to put strings on your assets.  The terms of your Living Trust agreement will set forth how your children are to receive their inheritance.  You can give your children full access to their inheritance at 18, or you can have a payout plan that gives your children access to their funds at specified ages or other specific milestones (e.g., upon getting married, upon graduating from college, etc.).  Some plans provide for 3 equal payments spaced 5 years apart, while others may have equal annual payments over a period of 5 or 10 years.  Having a payout plan such as this allows you to provide for your children, and also allows you to protect them from making poor choices with their inheritance if you pass when they are young.  While they may carelessly fritter away the first distribution, they will hopefully learn and make better choices in the following years.  Remember that these plans are just examples.  Your payout plan can be short or long; it can start upon whatever trigger event you choose; it can provide for wedding gifts, graduation gifts, down payment on a first home, or funds to travel the world.  It can require the Trustee to keep your home in the Trust until your youngest child graduates high school.  The sky’s the limit, but you do want to remember that the successor Trustee you select will be in charge of carrying out your rules, so sometimes simpler is better.

As you can see, a Living Trust allows for more customization and detail than beneficiary designations do.  Also, a Trust is administered completely outside of probate court (unless it is contested).  While a Living Trust may be more costly than the other options, the benefits it offers when you have minor children are immense.