Every parent wants to make sure their children are provided
for in the event something happens to them while the children are still minors.
Grandparents, aunts, uncles and other relatives often want to leave some of their
assets to young children, too. But good intentions and poor planning often have
unintended results.
For example, many parents think
if they name a guardian for their minor children in their wills and something
happens to them, the named person will automatically be able to use the
inheritance to take care of the children. But that’s not what happens. When the
will is probated, the court will appoint a guardian to raise the child; usually
this is the person named by the parents. But the court, not the guardian, will
control the inheritance until the child reaches legal age (18 or 21). At that
time, the child will receive the entire inheritance. Most parents would prefer
that their children inherit at a later age, but with a simple will, you have no
choice; once the child reaches the age of majority, the court must distribute
the entire inheritance in one lump sum.
A court guardianship for a minor child is very similar to
one for an incompetent adult. Things move slowly and can become very expensive.
Every expense must be documented, audited and approved by the court, and an
attorney will need to represent the child. All of these expenses are paid from
the inheritance, and because the court must do its best to treat everyone
equally under the law, it is difficult to make exceptions for each child’s
unique needs.
Quite often children inherit money, real estate, stocks, CDs
and other investments from grandparents and other relatives. If the child is
still a minor when this person dies, the court will usually get involved,
especially if the inheritance is significant. That’s because minor children can
be on a title, but they cannot conduct business in their own names. So as soon
as the owner’s signature is required to sell, refinance or transact other business,
the court will have to get involved to protect the child’s interests.
Sometimes a custodial account is established for a minor
child under the Uniform Transfer to Minors Act (UTMA) or Uniform Gifts to
Minors Act (UGMA). These are usually established through a bank and a custodian
is named to manage the funds. But if the amount is significant (say, $10,000 or
more), court approval may be required. In any event, the child will still
receive the full amount at legal age.
A better option is to set up a children’s trust in a will.
This would let you name someone to manage the inheritance instead of the court.
You can also decide when the children will inherit. But the trust cannot be
funded until the will has been probated, and that can take precious time and
could reduce the assets. If you become incapacitated, this trust does not go
into effect…because your will cannot go into effect until after you die.
Another option is a revocable living trust, the preferred
option for many parents and grandparents. The person(s) you select, not the
court, will be able to manage the inheritance for your minor children or
grandchildren until they reach the age(s) you want them to inherit—even if you
become incapacitated. Each child’s needs and circumstances can be accommodated,
just as you would do. And assets that remain in the trust are protected from
the courts, irresponsible spending and creditors (even divorce proceedings).
If you have questions or require counsel, call our California Estate Planning Attorneys, serving the San Francisco Bay Area.
