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Inheritance Planning

How to Leave Assets to Minor Children

Don’t Make These Common, Expensive Mistakes:

Most parents want 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 good friends sometimes want to leave gifts to beloved young children too.  Unfortunately, good intentions and poor planning often have unintended results.  Don’t make these common, expensive mistakes.  Instead, here’s how to both protect and provide for the children you love.

Common Mistake: Don’t Use a Simple Will to Leave Assets to Minor Children

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 in their wills.
  • 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.

Common Mistake: Avoid Court Guardianship

A court guardianship for a minor child is very similar to one for an incompetent adult.

  • Things move slowly and can become very expensive.
  • Every expense must be documented, audited, and approved by the court, and an attorney will need to represent the child.

All of these expenses are paid from the inheritance, and because the court must do its best to treat everyone equally under the law, it is difficult to make exceptions for each child’s unique needs.

Correct Action: To Protect the Child and the Assets, Use a Trust

Instead of using a simple will, a better 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.
  • And, anything that goes through probate, as these assets would, is visible the public which means predators, including unscrupulous family members and nosey neighbors, know what your child inherited.

The best option is a revocable living trust, the preferred option for many parents and grandparents:

  • The person(s) you select, 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 inherit–even if you become incapacitated.
  • Each child’s needs and circumstances – even special needs – can be accommodated, just as you would do.
  • And assets that remain in the trust are protected from the courts, irresponsible spending, and creditors (even divorce proceedings).

For many folks, the absolute best solution is to keep the assets in trust for their lifetime or until assets get spent down.  Assets that are trust protected are there for your child, but can’t be taken from them.  Your children will grow up and need the continued protections you can provide in a revocable living trust.

How to Leave Assets to Adult Children

How to Leave Assets to Adult Children
When considering how to leave assets to adult children, the first step is to decide how much each one should receive. Most parents want to treat their children fairly, but this doesn’t necessarily mean they should receive equal shares of your estate. For example, it may be desirable to give more to a child who is a teacher than to one who has a successful business, or to “compensate” a child who has been a primary caregiver.
Some parents worry about leaving too much money to their children. They want their children to have enough to do whatever they wish, but not so much that they will be lazy and unproductive. So, instead of giving everything to their children, some parents leave inheritances for grandchildren and future generations through a trust, and/or make a generous charitable contribution.
Inheritance Planning: Options
When deciding how or when adult children are to receive their inheritances, consider these options:
Option 1: Give Some Now
Those who can afford to give their children or grandchildren some of their inheritance now will experience the joy of seeing the results. Money given now can help a child buy a house, start a business, be a stay-at-home parent, or send the grandchildren to college–milestones that may not have happened without this help. It also provides insight into how a child might handle a larger inheritance.
Option 2: Lump Sum
If the children are responsible adults, a lump sum distribution may seem like a good choice–especially if they are older and may not have many years left to enjoy the inheritance. However, once a beneficiary has possession of the assets, he or she could lose them to creditors, a lawsuit, or a divorce settlement. Even a current spouse would have access to assets that are placed in a joint account or if the recipient adds the spouse as a co-owner. For parents who are concerned that a son- or daughter-in law could end up with their assets, or that a creditor could seize them, or that a child might spend irresponsibly, a lump sum distribution may not be the right choice.
Option 3: Installments
Many parents like to give their children more than one opportunity to invest or use the inheritance wisely, which doesn’t always happen the first time around. Installments can be made at certain intervals (say, one-third upon the parent’s death, one-third five years later, and the final third five years after that) or when the heir reaches certain ages (say, age 25, age 30 and age 35). In either case, it is important to review the instructions from time to time and make changes as needed. For example, if the parent lives a very long time, the children might not live long enough to receive the full inheritance–or, they may have passed the distribution ages and, by default, will receive the entire inheritance in a lump sum.
Keep in mind that pushing assets out of a trust in installments, leave assets vulnerable to the problems mentioned above in the “lump sum” option. Assets can be lost in divorce, seized in lawsuits, or spent foolishly. Some parents are concerned lump sum or installment gifts will fuel an addiction.
Option 4: Keep Assets in a Trust
Assets can be kept in a trust and provide for children and grandchildren, but not actually be given to them. Assets that remain in a trust are protected from a beneficiary’s creditors, lawsuits, irresponsible spending, and ex- and current spouses. The trust can provide for a special needs dependent, or a child who might become incapacitated later, without jeopardizing valuable government benefits. If a child needs some incentive to earn a living, the trust can match the income he/she earns. (Be sure to allow for the possibility that this child might become unable to work or retires.) If a child is financially secure, assets can be kept in a trust for grandchildren and future generations, yet still provide a safety net should this child’s financial situation change. This is our preferred method of inheritance planning as it’s a win/win for all. Assets are protected yet available.