While none of us like to imagine the worst, responsible planning means preparing for every possibility—including what happens if minor children inherit money. Special rules apply when a beneficiary is under 18 and it’s easy to inadvertently end up with a mess on your hands!
A minor is not legally eligible to manage financial assets inherited in their name. If a minor is named as a direct beneficiary—such as on a life insurance policy, retirement accounts, or in a will without proper custodial provisions—the probate court will have to step in to appoint a guardian of the estate until the child reaches age 18. This process can be time-consuming, costly, and a headache for everyone. Annual accountings are required to be provided to the probate court and any expenditures from the funds can only be made with prior approval from the court.
From a cost perspective, in addition to ongoing attorney’s fees, the guardian of the estate must be bonded, which means an insurance policy must be purchased to protect the money in the estate. The bond premium is based on the value of the estate and the amount of time until the child turns age 18, but it’s not uncommon for the bond to cost thousands of dollars. Another pitfall? The child receives full access to the assets at age 18—regardless of their maturity. Some courts will allow a guardian to petition to convert the guardianship into a minor trust, which allows the money to be held by the court until age 25. This helps allow the child time to mature, but increases the costs because the case will be open for a longer period of time.
If you have minor children in your life that would inherit from you upon your death, proper planning is absolutely crucial. There are many different options to plan for minors, ranging from simple Will-based estate planning with custodial language provided to defer funds until age 25, to more comprehensive Trust-based planning that allows deferred distributions to a later age and provides flexibility for spreading inheritance payouts out at different intervals.
If you have minors in your life and you are concerned you haven’t planned accordingly, we’re happy to help. Give us a call today!