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Leaving an Inheritance for Your Youngest Heirs

When thinking about leaving an inheritance for our loved ones, many of us think of the youngest and most vulnerable members of our families.  Children and grandchildren motivate us to think about a will and life insurance, but it is problematic to name minor children as beneficiaries. 

Minor children cannot legally own property.  If a beneficiary designation on a will, insurance policy, or other account only lists the name of a minor child, your estate will be tied up pending further legal proceedings.  Someone may need to be appointed as guardian of the estate of the minor child in order to receive the inheritance for the child, and it cannot be the child’s parent.  The parent will not be allowed to invest and grow the funds, which will be required to be deposited in an FDIC insured account.  The guardian must submit periodic accountings to the Orphans Court and submit to audits until the child reaches the age of majority.  At age 18, the full amount will be distributed to the child, whether the child is mature enough to manage it responsibly or not.  This is not the outcome most people want.  There are other options to leave property to benefit minor children that are simpler and may better meet your goals. 

One option is to simply not leave an inheritance to a minor child at all, and instead leave it to the child’s parent.  This approach reduces administrative complexity, but also eliminates any control you may want over the use of that property.  If an inheritance is left to the parent, it is the parent’s money to use as the parent sees fit.  There is no legal obligation for the parent to set it aside for the child’s benefit or use it for any specific purpose.  The funds become the parent’s property, which could be set aside for the child, but could also be spent on the parent’s wants and needs, taken by the parent’s creditors, divided in the parent’s divorce, or passed through the parent’s estate plan.    

Another option is to set up an account or beneficiary designation to reference the Pennsylvania Uniform Transfers to Minors Act (PUTMA).  This allows you to name a custodian to handle the funds for the benefit of the minor child subject to the rules in the statute.  This can be done by titling the account or beneficiary designation to “(adult) as custodian for (minor) under the Pennsylvania Uniform Transfers to Minors Act.”  A PUTMA account has the benefit of being relatively simple, while also ensuring the property is set aside for the minor child.  It gives the custodian some discretion to invest the property to grow the funds for the benefit of the minor child, but the custodian also has a duty to manage the property prudently.  At the custodian’s discretion, the property can be used for the child’s benefit before the child comes of age.  PUTMA should only be used if the amount is less than $25,000.  If the funds to be transferred to the minor child are more than $25,000, a court order is required to appoint someone as a guardian of the estate of the minor child and you end up in the same position as if it had just been left in the child’s name directly.  Court proceedings may also be required to replace a custodian if the designated custodian passes away before the minor child comes of age.  PUTMA accounts can be structured to set an age that the child must attain, up to age 25, before the property is distributed.  However, an interested party may petition the court for the property to be distributed to the child earlier at any time after the child reaches 14 years of age.  Most likely that petition would be filed by a creditor seeking to be paid or the provider of some type of public benefit, that would require the child’s inheritance to be used up before the child could receive benefits, such as disability benefits.

A third option is to set the funds aside for the minor child in a trust for the child’s benefit.  The trust can be established during your lifetime or through your will.  A trust gives you the greatest amount of authority to control how the funds will be used, who will have access to them, and when they may be distributed to the child.  You can name not just one adult to oversee the funds, but a line of successors to ensure there is always someone available.  You can name the child’s parent as the trustee if that is the person you believe is best able to manage the trust.  However, by designating a parent as Trustee rather than the direct beneficiary, you ensure they must follow your directions, they cannot use the property as if it were their own, and the property is not available to the parent’s creditors or divorce.  A trust can also provide for various circumstances that other methods cannot.  It can allow you to restrict the child from receiving the funds until an age at which you are comfortable with the child receiving them, set up tiered distributions at designated ages, or maintain the trust with limited distributions throughout their lives.  A trust can protect the funds from creditors to a greater degree than other methods.  It can also anticipate the possibility that the child may become disabled and require benefits that would be disrupted by a lump sum payment.  Certain types of trusts can save your beneficiaries money on inheritance taxes, simplify the administration of your estate, and help preserve your assets. 

As you can see, there are quite a few things to think about, and there is more than one way to arrange your estate plans to provide for your youngest beneficiaries.  The option that is best for you will depend on your particular circumstances.  You should talk to an estate planning attorney to determine how best to structure your estate plans, including any inheritance you would like to leave to minor children.

Kelly Walsh Appleyard, Attorney