When deciding how to pass on assets to your heirs, it’s important to consider where minor children fit in. Child inheritance laws generally prohibit children from inheriting land, real property or other assets if they’re under 18. Depending on probate and inheritance laws in your state, it’s even possible to exclude children from inheriting any of your wealth regardless of their age. But if you do want to make sure your children are taken care of financially if something should happen to you, there are some things you can do to provide for them in your estate plan. If you’re fleshing out your own estate plan, you may want some help from a financial advisor.
Do Children Have Any Right to Inheritance?
Children can inherit property or assets from their parents, grandparents or other relatives but they’re not always first in line to inherit. In other words, there’s no automatic assumption that if a parent dies their child will inherit all of their assets.
In instances where someone dies intestate, meaning they have no will, state probate laws typically give precedence to someone’s spouse first for inheritance purposes. If someone is unmarried or their spouse is also deceased, then the probate court can distribute assets to other heirs at law, starting with their children.
You can write a will specifically naming children and what you’d like for them to inherit. This helps to avoid the sticky issue of intestacy, which can result in your property being distributed to people that you may not wish to inherit. If you have additional children after drafting a will, you’d need to write a new will or add a codicil to ensure that those children are able to inherit according to your wishes.
What Can a Child Inherit?
Generally, children can inherit any assets in your estate that have not already been designated for someone else. So, children may inherit things like:
- Bank accounts
- Real estate
- Investment accounts
- Personal belongings
However, state laws typically prohibit children from holding property or other financial assets in their name if they’re not age 18 or 19, whichever is the age of majority in their state.
Does that mean assets can’t or shouldn’t be left to children at all? No, not necessarily. But you’ll need to make special provisions in your estate plan to ensure that a child’s inheritance is preserved until the child is old enough to manage it themselves.
Can Children Be Named as Beneficiaries?
Certain types of financial assets, including life insurance policies, individual retirement accounts (IRAs) and payable on death (POD) accounts allow you to name one or more beneficiaries. The beneficiary would be entitled to receive those assets and, in most cases, your beneficiary designations would supersede a will. So can you name a minor child as a beneficiary for your life insurance, IRA or bank accounts?
You could, if your life insurance company, IRA custodian or bank allows it. But you’ll also need to name someone else to manage those assets if the child is under 18 at the time they inherit them. That’s because, again, minors can’t own assets in their own name until they become legal adults.
Naming a minor as a beneficiary without also naming a custodian could cause delays in receiving those assets if you were to pass away. Talking to your financial advisor can help you decide if it makes sense to name minor children as beneficiaries for life insurance policies, retirement accounts or bank accounts.
How to Leave Money to a Minor Child
If you want to leave money or other assets to minor children, there are some things you can do to create a child inheritance plan. The first step is writing a last will and testament. This is something you can do with the help of an attorney or on your own using an online will-making software program.
Your will allows you to specify who you want to inherit and what you want them to receive from your estate. Keep in mind that in most states, you cannot exclude a spouse from your will if you’re married. This applies even if you’re separated. If you’re separated from your spouse you may want to talk to your financial advisor about the implications of drafting a will prior to divorcing.
In your will, you can name a legal guardian for your minor children. You can also name a property guardian. The legal guardian would be responsible for managing your child’s care while the property guardian would oversee any assets you leave to them. This could be two different people or the same person. You could then list out the assets you want your child to receive. If you have multiple children, you may specify what percentage of assets they should receive instead to keep things simple.
Aside from a will, you could establish a trust to hold the assets inherited by minor children. You would name a trustee who would oversee the assets according to your wishes on behalf of the children you list as beneficiaries. Establishing a trust allows you to leave specific instructions for child inheritance. For example, you could state that your child won’t receive the bulk of their inheritance until they, for instance, graduate college or reach age 30. You can also create a pot trust for all of your children or individual trusts for each child.
There are several types of custodial accounts that can be used to convey asset to minor children. If you have life insurance that you want to leave to a child, you can establish a custodianship under the Uniform Transfers to Minors Act (UTMA). With UTMA, you can name an adult to act as custodian for your child to manage any property, real or financial, they inherit without any need to create a trust.
Another option is a Uniform Gift to Minors Act (UGMA) account. This is an irrevocable account that gives you a lot of flexibility regarding what you’re giving the beneficiary. You can deposit money, savings bonds, stocks, annuities and even life insurance. Unlike a UTMA, this type of account can only hold financial assets.
A third option is a 529 college savings plan. These are sponsored by states, state agencies and educational institutions. You can use this tax-advantaged savings vehicle to stash money to cover higher education expenses. Unlike UGMA and UTMA accounts, however, you can’t store financial products or real estate in 529 plans. Earnings are tax free. Contributions are not pre-tax, meaning the federal government treats contributions as gifts for tax purposes. In other words, parents can contribute up to $15,000 a year without triggering any additional tax.
Leaving a child inheritance can help you pass on wealth to future generations and ensure that young children are taken care of financially should something happen to you. But it’s important to understand the financial or legal complications that might arise if you’re not planning properly.
Tips for Estate Planning
- Consider talking to a financial advisor about how to create an inheritance plan for your children. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to leave money for children to help pay for college, you could open a UTMA account. However, a 529 plan can sometimes offer more flexibility. A 529 college savings plan allows you to save for college on a tax-advantaged basis while naming your child as a beneficiary. You act as the participant and you can name another adult to act as successor participant if something happens to you. Once your child is ready to go to college they can withdraw funds for qualified higher education expenses tax free. Any unused money could be transferred to another beneficiary.
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