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Minors are not allowed to inherit property directly. Therefore, if no estate planning has been done and property is left to a minor, more than a few problems will be created. The family must apply to a court to appoint a guardian who will be responsible for the assets until the minor becomes of legal age.
Here are just a few scenarios that may result if a minor is left property directly:
Creating a trust for a minor offers a better solution and pre-empts many of the problems associated with guardianship.
What kind of trust should be created for a minor?
The type of trust created depends on the trust's short -and long-term objectives. If the goal is to create a trust to manage funds for the minor’s support and education, a testamentary trust created under their parent’s last will and testament may be appropriate. The trust takes effect following the probate of the last will. All assets passing through probate designated for the minor are transferred to the trust and managed by the trustee. The trust can exist for as many years as desired, eliminating the possibility of the minor inheriting a large sum when reaching the age of majority.
A life insurance trust could receive proceeds from a life insurance policy, with the assets being managed and distributed at the trustee’s discretion. Insurance companies cannot directly give proceeds from a life insurance policy to a minor. The trust, not the child, is the beneficiary of the insurance policy, and the trustee follows the directions in the trust.
An incentive trust is just as it sounds: a trust with specific language directing assets to be used for the minor child to meet certain goals. Completing a college degree, buying a first home and staying employed for a certain period are all typical goals set by trusts. There are also spendthrift trusts designed to protect assets from being lost to reckless spending habits and disregard for the value of the inheritance.
Can minors with disabilities inherit assets?
A child with special needs who receives government benefits, including Medicaid, could lose their eligibility if they inherit assets directly. Parents or grandparents of such minors should be mindful to only leave any inheritance to the child in a special needs trust.
What about UGMA accounts for minors?
Custodial accounts under the Uniform Gifts to Minors Act, known as UGMA accounts, were created to allow financial assets to be given to minors. However, once the child reaches the legal majority, they control the account, which can lead to an 18-year-old making bad and expensive decisions.
Trusts provide superior protection.
A trust may take more time to set up than other options. However, it is the best way to protect the minor child and the inherited assets. The planning should be done in concert with the overall estate plan to ensure its effectiveness and take advantage of tax benefits.
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