Yesterday I met with a super-nice couple. The couple is raising one of their grandchildren. The grandchild is five years old. The grandfather told me that he wanted to make sure the grandchild had funds available for college if the grandfather dies, so the grandfather had named his five year old granddaughter as a beneficiary of his IRA. When I heard that, I thought in the back of my mind, "This is a recipe for disaster because it will be a huge legal mess when a minor is named as an heir of an estate, or as a beneficiary of an IRA or life insurance policy."
Further, it appears that there are lots of google searches regarding minors inheriting. I'm guessing it's because the following reasons:
- Parents with minor children are the types of people that do google searches most often; and
- More than 50% of parents with minor children don't have an estate plan.
If your minor child inherits from you, or if you leave assets outright to a minor grandchild, a proceeding called a "guardianship" or "tutorship" will occur at the courthouse. A judge will select a guardian who will be responsible for the minor's assets. If the guardian needs to spend some of the minor's money for the minor, then - depending on your state's guardianship laws. the guardian may be required to file formal court pleadings requesting permission. It's complicated.
But it's less complicated until the minor turns 18 - then it gets real simple. When your minor child turns 18 (or, the legal age of majority in the state where the minor resides), the guardian must turn the assets over to the minor on his or her 18th birthday, and then your child may spend every last nickel before his or her 19th birthday. Isn't that nice?
The solution for parents with minor children, and grandparents who want to leave assets for grandchildren, is to work with the right estate planning attorney, the first time, and arrange for that inheritance to go into the right kind of trust for the benefit of the minor. Provide that upon your death your assets will be placed in trust for your children. Select an appropriate trustee. Work with the attorney to provide for the proper terms of the trust. This way the funds will be managed properly for your child and your child or grandchild won't be given the chance to blow through the inheritance at age 18 - wasting away an opportunity to go to college and get a head start on life.
Whatever you do...TAKE ACTION NOW. This is not an area where you can afford to procrastinate. Make sure this "To Do" item gets checked off your to-do list in early 2016.