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Leaving an Inheritance to Minor Children

A common mistake parents of minor children make is leaving their estate to a guardian and assuming that the funds will be used for the support and education of their children.  That arrangement, although simple, is fraught with danger.  The guardian may be a loving person but terrible at managing money, could end up in debt, become disabled or divorced, could die, or could use the money in ways that benefit the guardian more than your minor children.

There are better planning options for leaving an inheritance to minor children.

Uniform Transfers to Minors Act:  A UTMA account can be created to hold the assets of a minor (under 18).  The custodian manages the funds, and when the child attains age 21 (in Massachusetts), the balance of the account must be distributed the child outright.

Trusts for Children:  If distribution at age 21 seems premature, another option is to establish a trust — one trust for each child or a single trust for all children.  Specific instructions in the trust guide how the funds should be used, and final distributions can be made according to a schedule (e.g., 50% at age 25, the remainder at age 30).

You can create a trust for your children during your lifetime or include trust provisions in your will.  You can also establish a trust to hold a life insurance policy for the benefit of your children.  Trusts can also achieve other planning objectives, such as estate tax savings, central financial management, and minimization of probate.  If the child has a disability, a special needs trust can provide for long-term financial management and enhance the child’s quality of life without supplanting public services and benefits.

Qualified Tuition Plans (529 Education Savings Plans):  Grandparents often express the desire to leave a legacy to their grandchildren by funding their college education, which also eases the burden on their adult children.  Designed to encourage planning for future college costs, savings in Section 529 plans are federal income-tax free at withdrawal as long as they are used for qualified tuition, room and board, mandatory fees, and required books and computers.