A lot of people don’t realize that children who inherit money aren’t allowed to take control of the money until they reach legal adulthood. If money or other property is left outright to a minor, then the court gets involved and the money is either placed in a restricted account, or a special guardian is appointed to manage the property on the minor’s behalf.
If there’s a chance that one of the people you’re leaving property to might be a minor when the transfer happens, proper planning can simplify the inheritance process.
To do this, you’ll first need to decide when you want your beneficiary to receive the property and how you’d like it to be distributed.
If you want the money to be turned over to your beneficiary as soon as he or she reaches adulthood, then you can leave it in a restricted account. These accounts, often in the form of Uniform Transfers to Minors Act (UTMA) accounts or Uniform Gifts to Minors Act (UGMA) accounts, require that the money be spent on the child’s health, welfare and education. The main feature of this type of account is that all of the money in the account is handed over to your beneficiary, no strings attached, the moment he becomes of age. This makes restricted accounts an ideal option for a small inheritance. Larger amounts on the other hand, might be better handled with a trust.
With a trust, you can be a little more creative about how the money is distributed. You can certainly still allow your beneficiary to inherit a lump sum after coming of age or you can set it up so that the funds are distributed at certain milestones. 25% of the trust property for example, could be disbursed when a child reaches age 21, another 25% at age 25, and the remainder when the child turns 30.
You could also base the distributions on achievement milestones – 25% at high school graduation for example and then so much per year for every year that the child attends college with passing grades. You can even stipulate that the beneficiary will receive an amount equal to what he or she earns each year, so to receive an annual distribution, your beneficiary would have to present a W-2 to the Trustee.
This type of structure ensures that you heir is able to benefit from the inheritance but doesn’t rely on it completely.
One final note: if you’re concerned about what will happen to the property once it’s disbursed, and you want to leave a substantial inheritance to a minor, you could consider a lifetime trust. This works just like it sounds; the trust remains in effect for the beneficiary’s entire lifetime, with the assets being managed on behalf of the beneficiary. This option, while it carries the administrative expenses associated with any trust, can offer significant benefits, including possible tax advantages. Possibly the biggest advantage, though, is protecting the beneficiary from his or her own bad decisions.