Most parents want to name their children as beneficiaries of their trust and/or retirement accounts. Children without financial experience are often not mature enough to handle large amounts of money left to them, and by law – minors cannot manage an inheritance without an adult administering the assets until they reach the age of majority in their state, anyway.
It is best to choose someone over the age of 18 (or 21, depending on the state the minor lives in) to become the professional trustee of your minor's inheritance until they are old enough to manage it themselves.
If a minor is named the beneficiary and receives property or money, the minor will not have the authority to take control of that property or those finances until he or she reaches the age of 18 or 21 (depending on the laws of the minor's state). Minors cannot legally enter any contract or receive property until they are adults.
The exact details for what happens to the inheritance will also depend on the laws of the state where the minor lives, as well as the amount of the inheritance.
Rules on Minors of Beneficiary Individual Retirement Accounts (IRA)
There are special rules involved for naming a minor as the beneficiary of an IRA. If the money is left to a minor, he or she will need to set up a beneficiary IRA in their name with a custodian who is over the age of 18. The custodian of an IRA is like a trustee. The custodian is then in charge of withdrawals from the IRA to the minor.
The financial institution holding the IRA will most likely allow the minor to choose whoever he or she wants as their custodian. If you don't want to leave it up to your minor child to choose his or her own custodian on an IRA inheritance, name the custodian in your beneficiary document now. There is no legal law that forces the financial institution to honor the request of custodian, the chances are good that they will anyway just because you've indicated it in the paperwork.
Inheritance Under $20,000
If a minor receives property or money valued at $20,000 or less, many state laws will allow an adult to request the minor's inheritance to be paid in an account in the minors name under either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) . The adult is generally the minor's grandparent, aunt or uncle.
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In some states, money can be left to a minor in a 529 account in the minor's name.
Inheritance Over $20,000
If the state the minor resides in does not allow inheritance money or property to be placed in a UTMA, UGMA or 529 account, or if the value of the inheritance is greater than $20,000 – then a guardianship must be established for the minor through the court system.
- Probate estate – if an inheritance was left for a minor and a probate estate has been opened; then the executor of the estate is required to file a petition for the appointment of a guardianship on behalf of the minor.
- Life insurance policies or retirement accounts – for inheritances which do not have a probate estate, an adult can file a petition for guardianship appointment on behalf of the minor. The adult to file the petition is normally an aunt, uncle or grandparent of the child.
Let the Judge Decide
A judge will decide who to appoint as the guardian for the minor, through a court hearing where all interested parties have the opportunity to testify as to who they believe should be appointed guardianship of the minor's inheritance until the child reaches the age of 18 or 21, depending on the state he or she lives in. If the child is over the age of 12 or 13, he or she will also have a say.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific legal issues with your attorney.
photo credit: Dan Dickinson
