During the estate planning process, while you’re figuring out who you want to inherit your estate, you may also need to determine when and how. Minors (those who are under 18 years old) cannot legally own property, so you’ll need to make careful arrangements for them. Generally, most people plan for their minor beneficiaries by leaving the inheritance in a restricted account, leaving the inheritance in stages, or leaving the inheritance in a lifetime trust.
The first option is to leave the minor beneficiary’s inheritance in a restricted account. Georgia follows the Uniform Transfers to Minors Act (UTMA); these restricted accounts can be used to provide for the health, education, and maintenance of a minor until they reach the age of 21-years-old. (Other states may follow the Uniform Gifts to Minors Act or set the age of majority at 18-years-old). One of the main challenges of using a UTMA account is that once the beneficiary turns 21, they will receive all of the funds left in the account – no strings attached. Also, most states cap UTMA restricted accounts at around $20,000.
Another type of restricted account is the 529 account. With this plan, the inheritance only pays for the beneficiary’s college education. So, as a drawback, if the beneficiary decides not to attend college, the funds in the 529 account will have to go to another beneficiary.
Inheritance in Stages
A second option is to leave the minor beneficiary’s inheritance in a trust, with directions that the beneficiary be paid specific amounts in stages. Once the beneficiary reaches a certain age or they achieve a certain goal, they will receive a distribution of the inheritance from the trust. So, for example, a person can create a trust for a minor beneficiary and stipulate that they receive 1/3 of the funds when the beneficiary turns 21-years-old, another 1/3 of the funds when they graduate from college, and the remaining 1/3 when they turn 30-years-old. During that time, the trustee (the person managing the trust) could use the funds to help pay for the beneficiary’s education, housing, medical expenses, or other day-to-day needs.
It’s important to note that once the beneficiary receives all of the funds from the trust, those assets may be subject to lawsuits, divorce negotiations, and creditors.
A third option is to leave the minor beneficiary’s inheritance in a lifetime trust, or, in other words, a trust that exists their entire lifetime. There are a couple of benefits to this option:
- The lifetime trust can be set up so that a trustee manages the trust while the beneficiary is a minor, but then the beneficiary becomes the trustee when they turn a certain age (ex: 25, 30, 35-years-old).
- Lifetime trust assets are protected against lawsuits, divorce negotiations, and creditors. It also provides some protection against adult beneficiaries who have poor financial judgment.
- If there are assets left in the lifetime trust when the beneficiary dies, the grantor (the person who created the trust) can stipulate who or what will receive those remaining funds.
- With a generation-skipping lifetime trust, the beneficiary and their descendants will avoid certain estate taxes on the trust.
While a lifetime trust has a number of benefits, one of the drawbacks is the cost. These types of trusts incur additional expenses such as accounting costs, legal fees, and the cost of administering or managing the trust. So, it’s important to weigh the benefits of this plan against the potential expenses.
Have Additional Questions? Contact Brian M. Douglas & Associates’ Estate Planning Team
If you are creating an estate plan that includes minor beneficiaries, there are several accounts, plans, and trusts available. To discuss the best option for you and your family, please feel free to reach out to our estate planning team. You can reach us at (770) 933-9009. We’re happy to answer any questions you may have.