For clients with minor children, often one of the biggest concerns they have is over what will happen with the inheritance if their children were to inherit while they are still minors. Some of the most difficult questions they are faced with include:
- Who will care for my children?
- Who will manage the money for my children?
- At what age will my children be able to control the money themselves?
- What protections can I put in place for my children’s inheritance?
- What limitations are placed on the distribution of assets for my minor children?
- What guidelines are given to the person managing the money to assist them in making distributions for the benefit of my children?
- Will my ex-spouse who is a biological parent of my children have access to the money or involvement in the management of the assets?
These are all difficult questions, and they are questions that most of us to not like to think about. However, it is important to remember that you can control the answer to every question above based on your situation. First, however, let’s look at a brief summary of what happens if you do nothing to plan ahead for your minor children, which will give us the default answers to the above questions.
If you do nothing to plan now for your children:
- A Judge Chooses the Guardian for Your Children. If you have done no planning, this person will be selected by a judge and appointed guardian, with no guidance from you as to whom you would want to nominate.
- The Judge Chosen Guardian Will Manage the Money. The person who is appointed as the guardian of your children will be responsible for managing the money for the benefit of your children. The money will be handled however the appointed guardian deems appropriate.
- Children Receive Remaining Assets at Age 18 or 21. Your children will receive all of the remaining assets that they inherited at age 18 or 21, outright, depending on the size of the inheritance. If the assets are significant, the transfer could be held in an UTMA account, which would have a custodian -likely involving court action. After 18 or21, they would then have full access to all funds and there is no guidance or oversight from another person as to how they spend the money.
- No Protection of the Inheritance. No protections will be placed on the inheritance, meaning all inheritance that your children receive will be subject to any potential liabilities or creditors that arise in their lives.
- No Explicit Limitations on the Spending of the Inheritance. There will be no limitations placed on the distribution of assets for your minor children at any point. All distributions will be at the discretion of the appointed guardian or custodian, up until age 21, at which point the child will control everything.
- No Instructions for How the Money Should be Spent. There will be no guidelines for how you would want the money spent.
- Ex-Spouse May Have Control Over the Inherited Funds. If your ex-spouse who is a biological parent is named guardian, they will be in control of all of the assets while your children are minors. They will be instructed to use the money for your child’s benefit, however they will have full control of and access to all inherited funds.
While every family’s situation is unique, most people would agree that the above result is not ideal, and in some situations these results can be catastrophic. Again, remember that you can change the answers to the above questions by taking action and planning for your children now. Let’s now look at some of the ways that you can change these answers and achieve more positive results, keeping in mind that this is only an example, and there is really no limit to how you can customize the planning for your children.
By planning for your children now:
- Nominate Your Preferred Guardian. You can nominate the person you would choose to act as the guardian for your child. Ultimately, the court will have to approve and appoint any guardian, but they will give strong preference to your nomination.
- Choose Who Manages the Money for Your Children. You can appoint a person or entity of your choice to manage the money for the benefit of your children. This person is chosen solely by you, and does not have to be the same person who is appointed guardian. Often parents will choose someone different to act as the Trustee managing the money than the person who is appointed guardian, as there may be different characteristics that are sought for each role. This could be a friend, a family member, or a professional trustee or trust company – the choice is yours.
- Decide When Your Children Have Control of the Money. You decide at what age your children are able to control the money themselves. Importantly, this means that it does not have to be at age 18 – it could be at age 25 or 30, for example. You could require that the children achieve certain incentives or meet certain guidelines prior to accessing the money, such as graduation from college or beginning a career.
- Protect Their Inheritance with Lifetime Trusts. You can choose to leave your children’s inheritance in a lifetime trust for their benefit, which will offer them protection from potential liabilities that arise in their lives. This means that down the road, if they are involved in a divorce from their spouse, are sued, go through bankruptcy, or have other creditor problems, the assets that are left from you in their lifetime trust will be protected. This ensures that your children are the ones who enjoy and use their inheritance, not an ex-spouse, creditor, or lawsuit plaintiff.
- Limit the Access Your Children Have to the Inheritance. You can decide now what limitations will be placed on the distribution of assets for your minor children. You can restrict the distributions to certain percentages at various ages, perhaps one third distributed at age 25, one third at age 30, and one third at age 35. You can restrict the amount distributed for certain purposes, such as setting a limit of 10% of the trust to be distributed for the expenses of a child’s wedding or a limit of $15,000 annually for education.
- Leave Instructions for the Use of the Inheritance. You can outline the guidelines that your Trustee is to follow when making distributions for your minor children. You can include provisions that help give your Trustee and Guardian some guidance as to how you raise your children, what experiences and opportunities are important for your children to have, and overall how you want them to manage the funds for your children.
- Eliminate Access to the Inheritance by Your Ex-Spouse. You can act now to ensure that an ex-spouse has no access to or control over the inheritance or any funds that are received for the benefit of your children. Even if the ex-spouse is appointed Guardian by the court, you can choose a different person to be responsible for the money. This ensures that the money is used for the benefit of your children, that the ex-spouse cannot have access to the money to potentially use it against your wishes, and perhaps even removes some of the incentive for an undesirable ex-spouse to attempt to be appointed as guardian.