When it comes to estate planning, a top priority for most of us is making sure our children are taken care of after we die. The hope is that our children are adults by the time we pass; unfortunately, we all know this wish is not guaranteed. The best way to plan for your financial assets is to create an estate plan with the help of an experienced attorney, and this is especially important if the heirs of your estate are under 18 years of age.
Creating an estate plan in preparation for your death might be low on your to-do list if you are young and healthy, but knowing that your family will inherit your assets without complication provides a peace of mind at any stage of life. If you have minor children who you want to inherit your financial accounts and property, it's a good idea to meet with an estate planning attorney to discuss your options. When I meet with a client, I assess the size of their estate, including their financial accounts, properties, business interests, and investments. Then I recommend either a will or a living trust based on what the client's goals are. However, if the client currently has minor children, it can add an important complexity their estate plan. The best way to ensure that your child will receive their inheritance without conflict or complications is to create a minor trust.
How Do Minors Inherit Assets in Kentucky?
Like most states, Kentucky law does not allow minors to receive an inheritance outright. An inheritance intended for a minor must be placed either in a trust or in a custodial account. If it is not, then a guardianship or conservatorship must be created for the child.
A guardianship is a legal relationship, established by the court, in which a court-appointed guardian has custody of the child and controls the minor's assets until the child turns 18. Once the child reaches the age of 18 years, the guardian must release the inheritance to the beneficiary. By contrast, a conservator does not have custody of the child and only manages the inherited assets during that time frame.
As you can imagine, transferring a significant amount of assets to an 18-year-old is likely not the most favorable option. Teenagers generally lack the life experience and maturity to know how to handle significant amounts of money effectively. Without proper guidance, many teenagers will spend money on frivolous items, like expensive cars and elaborate trips. Even teenagers who are more cautious with their spending habits may lack the experience to know how to invest or save inheritance funds.
If you have not created a trust or custodial account for your child at the time of your death, understand that the Court will likely appoint a guardian or conservator. Obviously, a court official does not have the same first-hand knowledge of your family dynamics as you do. The Court will appoint whomever it deems most appropriate to serve as the guardian, but there is a likelihood that the person the Court appoints is not the person you would have chosen to manage your assets for your child.
To avoid the creation of a problematic guardianship or conservatorship, the best step is to create a minor's trust in your will or living trust. This type of trust will ensure your minor children will receive their inheritance the way you direct it and at the age you determine.
Trust for a Child: The Solution to Avoiding Guardianship
Since many of us are uncomfortable imagining our children spending a large inheritance at 18 or imagining who the Court might select to manage our children's inheritance, a more attractive option is to establish a trust outlining your wishes. You can create a trust for a child in your will or in a living trust, and the trust will continue to protect your minor child's inheritance after your death.
Setting up a trust for a child is a relatively straightforward process. Whomever you appoint as the trustee will manage the assets in the trust until the beneficiary turns a predetermined age. Unlike a guardian, a trustee is hand-picked by the creator of the trust. The ability to appoint a trustee whom you know well and trust to manage your child's assets is likely the biggest advantage of creating a trust for a child. Knowing that a loved one, rather than a Court-appointed guardian, will take care of your child's inheritance after your death relieves some of the anxiety associated with estate planning.
Once you have appointed a trustee, your estate planning attorney will draft the terms of the trust. Explain to your attorney how and when you want your child to receive their inheritance, and your attorney can stipulate in the trust exactly how you want your assets to be taken care of for your child. Here are some common provisions that can be included in a trust for a child:
- Beneficiary age provision – One of the major advantages of creating a trust for a child is that you are not required to relinquish a child's inheritance the moment the child turns 18, the way you would if the child's inheritance was held by a guardianship. Most estate lawyers advise setting the inheritance distribution age limit at 25 years or older.
- Split distributions – If you are uncomfortable leaving your child a lump sum of money, your trust can split the assets so that your child receives pre-specified payments throughout their lives. For example, you can split the inheritance into four portions where the beneficiary receives a payment at 25, 30, 35, and 40 years of age.
- Allocate funds for specific milestones or events – An experienced attorney can help you allocate sums of money that will be disbursed to the beneficiary at specific times in their lives. Even if you can't physically be with your child when they graduate college, get married, or buy a house, you can support such future events with the assets in your trust.
While these are the most common provisions included in a minor trust, your attorney can explain additional options during your consultation.
A final advantage of creating a trust for your minor child is that trusts provide financial privacy. Because both a guardianship and conservatorship are established by the Court, the record of the appointment and the child's inheritance are available to the public. Most people value financial privacy, both for themselves and for their children, and the publicity created by a guardianship is not an appealing thought for most. In contrast, the terms of a trust are private to everyone except for individuals who are directly connected with the trust. This means that the grantor (creator), the trustee, and the beneficiaries are the only people who have access to the financial and property information held within the trust. Anyone who is not involved with the trust does not readily have access to the account information or properties held within the trust.
If you are considering leaving a child assets in your estate plan, consider leaving them in a trust. Leaving those funds in trust ensures that additional costs will be avoiding in creating a guardianship or conservatorship for the child. Additionally, minor's trusts can be tailored to suit your individual circumstances and contingencies that you desire for distribution.