When preparing for how the lives around you will be affected when you pass away, you want to make sure those who depend on you will be kept financially secure.
Dealing with your loss will be hard enough, you want to ease their pain in any way you can by providing them with financial peace of mind.
If you pass away and have named a minor as the beneficiary of your estate, a trust, retirement accounts, bank accounts or any other financial account, they will face challenges receiving the assets at the settlement of your affairs.
Further, minors might not have the financial experience nor maturity to handle large amounts of money you leave them, and by law-minors cannot manage an inheritance by themselves.
They need an adult to administer the assets until they reach the age of majority in their state, allowing them to receive the assets you intend for them to have.
In the event you need to know what happens if a minor is a beneficiary of an estate, trust, retirement account or other financial arrangement, this article answers the questions about managing your minor’s inheritance.
What Happens if a Minor is the Beneficiary of an Inheritance from Will or Trust?
When property gets left directly to a minor beneficiary, such as through communal ownership of property (joint ownership of property) or a payable-on-death (POD) account, the minor doesn’t have legal authority to take control of these assets due to their minor status.
Minors technically aren’t allowed to own property until they reach the age of majority in their state. In situations like this, minors need to have a designated or appointed custodian handle their financial affairs.
In most cases, this would be a parent or guardian, but can also be a trusted family member or professional who has expertise handling such matters.
Minor beneficiaries also can’t inherit money directly if they receive an inheritance via a last will and testament, nor from an intestate estate (when the deceased passes away without a will) or when a living trust didn’t have a proper drafting.
When this happens, the executor of the estate will not honor those terms.
When this happens, state law intervenes and determines the decedent’s estate as well as how to measure and distribute it.
In most cases, this typically results in the closest relatives inheriting property and the estate only transfers to more distant relatives if the decedent had no spouse or children.
What happens in the case of a minor beneficiary being slated to receive an inheritance from an estate will vary by state where the minor lives, but also based on the value of the decedent’s bequest.
UTMA, UGMA and 529 Accounts
Inheritance Under $20,000
In the event a minor receives property or money valued at $20,000 or less, many states will allow an adult (typically a parent, grandparent, aunt or uncle) to request the minor’s inheritance to be transferred to a custodial account held in the minor’s name.
These accounts come from either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) and can hold the funds until the minor reaches the age of majority. In most states, this will be the age of 18, but others require the minor to reach the age of 21.
Instead of UGMA and UTMA accounts, some states also allow money left to a minor beneficiary to be placed into a 529 account held in the minor’s name.
These tax-advantaged investment accounts allow people to save for educational expenses like private K-12 schooling or college.
In some states, a surviving parent can assume personal management over very small amounts, typically $5,000 or less.
When the decedent is a parent or grandparent and the minor beneficiary receives funds of this amount, the surviving parent would not need to use a UTMA, UGMA or 529 plan.
Inheritance Over $20,000
For larger sums of money due to be inherited by a minor beneficiary, the rules change.
If the state of residence for the minor doesn’t allow inherited funds to go into UTMA, UGMA or 529 accounts, or if the value of the inheritance is greater than $20,000 – then the minor will need to have a guardianship established through the court system.
They’ll face two possibilities:
- Probate estate – If a minor receives an inheritance through a probate estate, the executor will need to file a petition for the appointment of guardianship on behalf of the minor beneficiary.
- No probate estate – If the current situation calls for an inheritance without a probate estate, such as with life insurance policies or retirement accounts, an adult can file a petition for guardianship appointment on behalf of the minor. When this happens, the adult filing the petition is usually a close relative to the child like a parent, grandparent, aunt or uncle. However, the adult does not need to be a relative.
Letting a Judge Decide (with Input)
If you have not laid out specific instructions through a will about who will become the guardian of the minor, a court hearing will take place where all interested parties have the opportunity to testify about who they believe should manage the minor’s inheritance until reaching the age of majority.
In the event the child is over age of 12 or 13, he or she will also have a say.
Should You Set Up a Trust for the Minor Beneficiary?
If receiving assets through a non-probate estate, such as when a minor beneficiary receives life insurance proceeds or funds from a retirement account, they will face a conservatorship arrangement to manage these funds on their behalf.
When a conservatorship begins for the minor, the appointed conservator will take over management of the minor’s inheritance until reaching the age of majority in the minor’s state of residence.
To avoid the complication of having a conservator appointed on behalf of handling an inheritance, parents can name a conservator of their choosing in their estate planning process.
One great way to have all of these details covered in alignment with your wishes is through use of a service like Trust & Will.
Minor oversights can have big consequences, such as when you name your minor children beneficiaries of your life insurance policy proceeds.
On the surface, this seems like a logical decision and one made from a point of concern about their financial well-being after your death.
However, leaving the proceeds to your surviving minor children can require a guardian be appointed to administer these proceeds—someone your surviving next of kin will need to find and research during an already difficult time.
Instead, set up your affairs ahead of time by creating a trust through Trust & Will.
A trust is a more detailed arrangement than a UTMA, UGMA or 529 account designation.
Further, it provides increased control over how inherited assets can be used, like those from retirement accounts, an estate or life insurance policies intended to be received as a beneficiary.
A trust can be established to receive and manage the life insurance policy of a beneficiary who is either an adult family member with special needs, or a minor child.
If a minor is the beneficiary of an insurance policy, then the trust will be designated as beneficiary to receive life insurance proceeds in most cases.
The benefits of doing this? You get to establish the terms by which assets in the trust can be distributed and used.
In this way, life insurance proceeds and other inherited assets could take care of your loved ones in the most efficient manner and in alignment with how you intend.
When it comes to minor children and other dependents, this often works in their best interests.
And of course, establishing a trust in accordance with your wishes works in everyone’s best interests because it gives everyone extra peace of mind.
You’ll also want to have all of these details kept safe and secure as well as be readily shareable with loved ones and professionals in need of the details.
How to Organize These Details
Trustworthy is the only app that helps you organize, manage, and securely share all of your important family information with just a few taps.
With the app’s easy-to-use interface, you can create profiles for everyone in your life—from grandparents to grandchildren—and invite trusted professionals like doctors, lawyers or accountants as collaborators.
The service will even send intelligent reminders to make sure nothing slips through the cracks. And if something does happen, Trustworthy offers concierge services so you’re always prepared for any scenario.
That’s why it’s time to download Trustworthy today and use the 14-day free trial to see if it makes sense for your needs.
It takes minutes to get started and there are no limits on how many people can be in your family profile (or how many collaborators).
Plus, Trustworthy’s VIP service will help ensure everything gets taken care of should anything ever happen to one of you.
How Does a Trust Work?
There are two important components that make up the estate planning process: a Last Will and Testament and Trusts.
Most people probably have some decent level of understanding about what a Will accomplishes (carrying out your final wishes and bequeathing assets in accordance with how you want) while trusts can be a little more difficult to understand.
Wills are common ways to distribute assets after someone dies, but most people don’t know much about the type of Trusts that can become a part of one.
However, there are a number of reasons why a trust is worth considering as part of your estate planning.
Trusts typically come into the picture when it comes to estate planning for those with over $200,000 in assets. Trusts can also be a great resource for parents who need to decide the fate of their assets after they die.
If you need to have someone control how your assets get distributed—and when—to your children, whether from a previous marriage or if they are minors, trusts can help.
A trust offers the power to hold assets for your beneficiaries until a future event, so what you want to happen will take place when you want it. It also has some control over your final wishes.
You can appoint a trustee to oversee and manage the funds until the minor reaches maturity.
The trustee may use or invest these funds to generate income and distribute it among the beneficiaries of the trust, as instructed by the person who established the original will/trust document.
One way to ensure your children receive their inheritance in a structured manner is by naming them as beneficiaries of the trust.
Trusts can be created with certain life milestones in mind, where your children can receive funds from the trust after graduation from high school or college or even after marrying.
To learn more about these legal arrangements, consider visiting Trust & Will to understand when a trust might make sense for your estate planning needs.
Rules on Minors of Beneficiary Individual Retirement Accounts (IRA)
There are special procedures for naming minor children as beneficiaries of IRAs. If the money is left to a minor, they will need to establish an IRA in their name themselves that is overseen by someone over 18.
This is called an inherited IRA and the custodian of an IRA acts like a trustee. If a minor is a beneficiary, the custodian has control over withdrawals from an IRA.
This is a general overview of the information available and does not constitute specific individualized tax, legal and investment planning advice. There are many legal matters that might affect a minor who is the beneficiary. However, you should communicate with your lawyer before proceeding.
About the Site Author and Blog
In 2018, I was winding down a stint in investor relations and found myself newly equipped with a CPA, added insight on how investors behave in markets, and a load of free time. My job routinely required extended work hours, complex assignments, and tight deadlines. Seeking to maintain my momentum, I wanted to chase something ambitious.
I chose to start this financial independence blog as my next step, recognizing both the challenge and opportunity. I launched the site with encouragement from my wife as a means to lay out our financial independence journey and connect with and help others who share the same goal.
I have not been compensated by any of the companies listed in this post at the time of this writing. Any recommendations made by me are my own. Should you choose to act on them, please see the disclaimer on my About Young and the Invested page.