One of the most costly and common mistakes I witness from my first time clients is naming their minor children as direct beneficiaries under their life insurance and retirement plans.
Minor children (under the age of 18) cannot legally inherit property in the eyes of the law. If you die and leave property directly to your minor children, the guardians of your children will not be able to use the property without first initiating legal proceedings with the court to establish what is known as a conservatorship.
A conservatorship is an arrangement where the court designates a person or corporation to manage the devised property for your minor child’s benefit until the child reaches the age of 18. All conservatorships are subject to court oversight and strict reporting requirements. The legal fees involved in setting up and maintaining a conservatorship can easily extend into the thousands of dollars and those fees will come out of the property that you intended to leave to your child. The good news is that with some simple planning a conservatorship can be easily avoided using the following methods:
Uniform Transfer to Minor Act (UTMA). Under the UTMA you are allowed to designate a person or corporation in either your will or your living trust to manage any property you intend to leave to your minor children on their behalf. The legal term for this person or entity is the “custodian.” Under the UTMA the custodian has broad discretion to manage and distribute the property for your child’s benefit. Unlike a conservatorship, the custodian is not subject to court supervision and many of the legal fees described above are avoided. Once your child reaches a certain age (21 in Kansas, Missouri and Nebraska) the custodianship ends and any remaining property is distributed directly to the child. This is a great inexpensive option especially for parents with very young children. For parents with older children or that desire to leave funds in trust for their children over a longer period of time you may want to consider one of the options below.
Creating Trusts for Your Children. Parents desiring greater flexibility over the distribution of their assets to their children may consider utilizing a trust for their children rather than relying on the UTMA. Setting up a trust for your children is similar to setting up a UTMA custodianship. In your will or living trust you designate a person or entity known as a “trustee” to manage and distribute any property you intend to leave to your minor children for their benefit. Instead of being subject to the rules set forth in the UTMA, the trustee has a fiduciary obligation to follow the specific language that you insert into your will or living trust. When you utilize this option you are free to customize the trust arrangement anyway you feel fit. You can designate what expenses will be covered by the trust (e.g., health, education, support), what age your children will ultimately inherit the property outright (e.g., age 21, 25, 30, 50, etc), when distributions should be withheld from the beneficiary such as in the events of alcohol or drug dependence, designate specific requirements for educational distributions, such as maintaining a certain grade point average, and how the property should be distributed in the event that you are predeceased by a child. The options truly are endless for the parent desiring or needing to exert a certain amount of control over the flow of money to their children. When structuring trusts for multiple children you have two primary options: (i) a family pot trust and (ii) separate trusts for each of your children:
To learn more about these techniques check out my 100% Free Guide THE PARENT’S ULTIMATE GUIDE TO ESTATE PLANNING or schedule your free initial consultation today.
John Thompson is a shareholder with Kennedy Berkley Yarnevich & Williamson, Chartered assisting entrepreneurs, families and farmers in the areas of estate and business planning.