How to Leave Gifts to Minors

Your estate plan may address two significant concerns if you have children under age 18. Those concerns are 1) who will raise your minor children if you die, and 2) who will supervise property you leave for them. These are common concerns for Fort Wayne area residents and for anyone with minor children regardless of your state of residency. In your will, you may nominate a guardian for your children. We will address this topic in greater detail in a later blog.

The current blog addresses management and control of property you leave for your children. Children under age 18 cannot legally inherit or own property. By law, an adult or an institution such as a bank must own and manage the assets for the benefit of your minor children. In your estate planning, you have an opportunity to designate the party responsible for supervising any property your minor child may inherit. This arrangement will include all property you leave and other property they may acquire by gift and from any other source.

There are three commonly used tools to provide legal supervision for gifts to minor children:

  1. Naming a custodian to manage the property under the Uniform Transfers to Minors Act (UTMA), or similar legislation also known as the Uniform Gifts to Minors Act (UGMA).
  2. Creating a “pot trust” to hold property left for the benefit of all of your children.
  3. Creating individual trusts to hold property for the benefit of each child separately.

 

Uniform Transfers to Minors Act and Uniform Gifts to Minors Act

Most states have adopted either the Uniform Transfers to Minors Act or the Uniform Gifts to Minors Act. Both acts authorize you to name an adult custodian or a financial fiduciary as custodian to manage property you leave or gift to your children or other minors, such as your grandchildren. The custodial arrangement ends when the child attains either age 18 or 21, as specified by state law. Any property remaining under the custodian’s control is distributed outright to the child or children at these ages. Until the child reaches the attained age, the custodian has the authority to manage and to exercise with discretion distributions in the best interest of the child. If you want to keep the property together for the benefit of all the children, you may prefer another tool known as a pot trust.

The “Pot Trust”

You may create a trust in your will for the benefit of all of your children. Trusts created in wills are known as testamentary trusts. A trust creates a legal arrangement between one person, the trustee, who owns the property, and another person, the beneficiary, who is entitled to receive the benefit of the property. With a pot trust, all of your property is placed in trust for the benefit of all your children and one trustee manages all of the property. The trustee is not required to spend the same amount of funds for each child. For example, one of your children may require an expensive medical procedure and most of the trust funds might be needed for that child’s benefit alone, leaving your other children with disproportionately less. Or, the educational aptitudes and desires of your children may vary, prompting the trustee to spend more money on education for one child versus the other(s). The lesson is that property is available for any child’s needs as determined by the trustee at the time.

A pot trust usually makes sense when your children are fairly close in age. Normally, the trustee is directed to divide up the remaining property when the youngest child attains age 18 or older. This would require children much older than your youngest to wait well beyond their 18th birthday before receiving their proportionate share of the trust.

Individual Trust

If you prefer that your children receive their property based on their attained age, you may create a separate trust for each child. The assets held in a separate trust are distributed outright when the child attains the age you have designated. You may select an age for each child based on your judgment of their ability to manage the assets you have designated for them. These trusts often terminate at age 35 because they are not intended for lifetime property management. Age 35 is often selected because the child will have established a career and financial stability by this age, and therefore career decisions are not adversely affected by inherited wealth. Until your child attains the specified age, the trustee manages the assets and is usually authorized to make distributions to your child for health, support, and education. You may give the trustee broad discretion to interpret these needs, or define distribution terms in a more limited way by, for example, capping the dollar amount distributed annually.

None of these tools require court supervision. However, it is important to consider thoughtfully your specific preferences. We are available to discuss these tools and others that may suit your needs and objectives when planning for minor children.