Smith 
Most parents want to name their children as the beneficiaries of their trust or retirement accounts. However, kids often lack the financial experience to handle a lot of money, and, by law, minors can’t manage an inheritance without an adult until they reach the legal age in their state. It’s smart to pick someone over 18 or 21 (depending on the state) as the trustee to manage the child’s inheritance until they are old enough to handle it themselves.
If a child is named the beneficiary and receives money or property, they can’t take control until they are 18 or 21, according to state laws. Legally, minors can’t sign contracts or handle property until they’re adults. The details of managing the inheritance depend on the state laws and the inheritance amount.
The law is clear: minors can’t manage their inheritance alone, so an adult trustee or custodian must handle it until they reach adulthood. This person needs to be trustworthy and good with money to manage the assets wisely and in the best interest of the minor.
When a minor is named as the beneficiary of an IRA, special rules apply. The child must set up a beneficiary IRA with an adult custodian. This custodian manages withdrawals and makes sure everything complies with tax laws. Financial institutions usually let the minor choose the custodian, but parents can specify their preferred custodian in the documents to avoid issues.
UTMA (Uniform Transfers to Minors Act) and UGMA (Uniform Gifts to Minors Act) accounts allow minors to receive gifts and inheritances with an appointed custodian managing the assets until the child grows up. These accounts are useful for inheritances under $20,000 and are simpler alternatives to trusts and guardianships with less legal hassle.
Another option is to place a minor’s inheritance into a 529 college savings plan, which is earmarked for education and offers tax benefits. The growth in a 529 plan is tax-free if used for qualified educational expenses, making it a good choice for families investing in a child’s future education.
For inheritances under $20,000, state laws often allow the money to be managed by an adult through a UGMA or UTMA account. The manager is usually a grandparent, aunt, or uncle. In some states, funds can also be placed in a 529 account.
For inheritances over $20,000, or in cases where UTMA/UGMA accounts and 529 plans are not allowed, setting up a guardianship through the court system is necessary. A petition must be filed, often by a close relative, to appoint a guardian to manage the assets. A judge decides based on various factors, including the child’s age and wishes if they are 12 or older.
Both UTMA/UGMA accounts and trusts come with specific tax implications. The "kiddie tax" might apply to unearned income in UTMA/UGMA accounts, and trusts have their own tax considerations. Working with a tax professional is crucial to navigate these rules and ensure the minor’s inheritance is managed tax-efficiently.
Ensuring financial security for minor beneficiaries is complex, involving legal and financial planning and understanding tax implications. Utilizing UTMA/UGMA accounts, trusts, and careful tax planning can create a solid financial foundation for children. Consulting with professionals is essential to make well-informed decisions aligned with the minor’s best interests.
This information is not a replacement for personalized tax, legal, or investment advice. Discuss your specific legal issues with your attorney.
