Estate Planning for Minors

Estate Planning for Minors is more important than some think.  When clients are preparing their estate plans, many have children below the age of 18, and desire to have their children take most, if not all, of their assets upon their transition.  Children are often left as the beneficiaries of life insurance policies, retirement accounts and even as real property joint tenants.  In this article I will share why leaving your children as beneficiaries of your insurance, retirement accounts and as joint tenants on real property is not the best option, and why executing a Trust and other estate plan documents may provide your child with the best planning for their future.  

An individual under the age of 18 years old is considered to not have sufficient “capacity” to accept transfers of assets.  If a parent dies and leaves his or her assets, including, but not limited to, life insurance policies, retirement accounts and real property to their child who is a minor, the child would need a guardianship of the estate established on their behalf. A guardianship of the estate requires a petition to the court, an initial hearing and further hearings, depending on the case. Notice is given to the child’s brothers and sisters, paternal and maternal grandparents and any living parent. A filing fee to file a guardianship petition is required, and most of the time, individuals hire attorney.  Thus, the process can get expensive.  Even if the child has a living parent, that parent is still required to establish a guardianship of the estate to receive any assets left to their child by the deceased parent.  There are two basic problems with a guardianship of the estate. First, the funds are generally ordered for placement in a blocked bank account, and none of the funds can be spent for any purpose without filing a petition to the court to allow some of the money to be released. Second, the funds are distributed to the minor when the minor turns 18. A better way to leave assets to your child is through a Uniform Transfer to Minors Act transfer, and a better way is through the vehicle of a trust.

The most simple method of making gifts to minors is the California Uniform Transfers to Minors Act (CUTMA).  Under CUTMA, a Custodian is named (typically in a Will) to hold, invest, and spend assets for the minor child when the parent transitions. The Custodianship may last until the minor reaches age 21 if the parent specifies, and if no age is specified, the minor becomes the outright owner of the gift when the minor reaches age 18. The drawback to such an account is that the minor automatically receives the assets left in the CUTMA account at 18 or 21, and is free to do what they like with the asset!  This could mean spending money on a new car, vs. college tuition, selling home, vs. retaining the home as an asset, and even traveling the world and coming back home flat broke!   A better method is to establish a formal Trust for minors.

A Trust allows assets to be held for the child, even after he has reached age 21. A Trustee is appointed to spend, invest and hold assets for the child until the parent deems the child is ready to manage the assets, which may be never!  This protects against the child foolishly spending money without the consent of the Trustee. Typically, the Trustee uses the Trust assets for the health, education, and support of the child. When the child reaches whatever age is specified in the Trust document, the child gets the assets without any further supervision.  In some trusts, the child can get lump sum payments when they reach certain ages.  In other trusts, the Trustee manages the Trust until the Trust assets are fully exhausted.  A parent has broad authority and creativity to distribute assets to their child as they see fit through a Trust.  That is the beauty of it.  If you have a child with a drug or alcohol addiction, the Trustee can distribute funds to make sure that the child’s basic needs are met without providing a lump sum of funds that could further contribute to the addiction.   A child who is a “spendthrift” would also be protected from over spending and shield creditors from reaching those funds.  Trusts establish a way of transferring assets to your child upon your transition without the need of a court petition, and without the worry that your child may not spend your hard earned assets frivolously.  

Establishing a Trust and guidelines for your minor children to receive your assets upon your transition should be considered a high priority.  Their future depends on it!  

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