Planning an Inheritance for Minor Children: The Basics

Estate planning is preparing for the inevitable - but also the unexpected. When you have minor children, it’s even more important to do this planning so you can feel at ease knowing they will be taken care of should something happen to you.

What and how to do this is a question I often get from parents. If not done properly, leaving an inheritance to a minor can create many unintended delays. The various things to consider can be complicated, so understanding the basic concepts covered in this article won’t give you all the answers you need, but they will definitely help you get started.

First Things First: Can a Minor Inherit Money or Property?

The answer is yes. You can definitely name a minor as a beneficiary to inherit money and property. For clarity, this includes money, real estate, vehicles, investments, and other property. But – and this is very important to understand – there are laws in place that prohibit them from managing or controlling that inheritance until they reach an age legally recognized as being an adult. This is known as the age of majority. While 18 is overwhelmingly the accepted age, there are currently three states that differ:  

• Alabama – Age 19

• Mississippi – Age 21

• Nebraska – Age 19

So, until the age of majority is reached, an adult must manage their inheritance for them. One of the most common ways you might meet this requirement is by naming a “custodian” - if the estate assets are transferring through a will - or naming a “trustee” if they are transferring through a trust.

How Are the Assets Managed?

Whether functioning as a custodian or a trustee, both have a legal responsibility to use the inherited money for the benefit of your child. This may include expenses such as:

• Education

• Medical costs

• Housing and support

• Activities and needs that benefit the child

Currently in all but two states (South Carolina and Vermont), custodial arrangements are created under laws called the Uniform Transfers to Minors Act (UTMA). That being said, you may still hear the older term “UGMA” (Uniform Gifts to Minors Act), which was an earlier version of these laws and is still referenced by some financial institutions.

Once your child reaches the age of majority, the remaining assets become theirs to control directly unless you have placed other restrictions on them.

Choosing the Right Person to Manage the Money

It’s not uncommon for whoever is raising the child to also be the person who manages the inheritance. That doesn’t mean you can’t name someone else if that is your preference. Either way, having the right person in place will significantly impact how efficiently the assets are managed.

Consider having someone who is:

• Responsible

• Organized

• Financially trustworthy

• Willing to follow your wishes

• Able to communicate well with family members

What’s The Best Way to Set Up the Inheritance? 

This is definitely a challenging part of your planning because everyone’s needs are different and estate planning for children deserves careful attention.

The most common ways are through a will or through different types of trusts. In addition, naming a child directly as a beneficiary on assets that have that option can be useful to avoid probate. Let’s look at some of the pros and cons of each method.

Leaving Assets Through a Will

Assets transferring through your will is one of the simplest and least expensive planning options and may work well for you if a small inheritance is being given and you don’t mind the delays inherent with the estate going through the probate process. The inheritance and custodian are named in the will, and both are then governed by the UTMA laws, which control:

• How the money is managed

• The custodian’s authority (meaning you can’t provide instructions with conflicting authority)

• And when the child receives control (meaning you can’t designate an age past the age of majority)

Key Takeaway: A simple will-based custodial arrangement may work well for smaller inheritances, but it offers far less flexibility and long-term control than a trust.

Using a Testamentary Trust

If the inheritance is of a significant amount, you may prefer more control than what a will allows. Fortunately, there is an option to include a “Testamentary Trust” for a minor directly in your will. The trust then has governing control, not the UTMA laws, and this allows you to customize instructions however you want, such as:

• when distributions are made

• how the funds may be used

• if, or when, the child receives full control

This also allows the trustee to have more authority and flexibility than a UTMA custodian and may give you ways to address protecting assets and more.

Key Takeaway: A testamentary trust allows you to customize how and when a child receives an inheritance instead of relying solely on standard UTMA rules.

Using a Revocable Living Trust

Many estate planning professionals prefer this approach over creating a trust directly within a will because it can provide additional control and flexibility. It also makes it easier for others to contribute (such as grandparents); especially because the trust continues operating after your death rather than needing to be created later through the probate process.

This type of trust may be most useful when:

• The inheritance is substantial

• The child is very young

• There are blended family concerns

• There are special needs considerations

• The family wants long-term control over distributions

• There are concerns about maturity or spending habits

Instead of naming the child directly as beneficiary, you may be advised to name a trust for the child’s benefit as beneficiary of the life insurance policy or other account. The trustee would then manage the funds according to the trust instructions.

This trust can:

• Avoid some of the complications of naming a minor directly

• Provide clearer management instructions

• Allow funds to be distributed gradually over time

• Protect assets longer than a basic custodial arrangement

• Help manage larger inheritances

For example, instead of receiving everything at age 18, a child might receive distributions at ages 25, 30, and 35.

Another important thing to keep in mind: I mentioned in the beginning that inheritances are not always just cash or financial accounts. A minor may also inherit real estate, vehicles, land, or other property. In those situations, the custodian or trustee is generally responsible for managing the asset until the child reaches adulthood.

That can include paying taxes, insurance, maintenance costs, or even deciding whether selling the property is in the child’s best interest. This is one reason trusts are often preferred for larger or more complicated inheritances.

Key Takeaway: A revocable living trust can provide greater flexibility, longer-term protection, and smoother management for larger or more complicated inheritances.

Naming a Minor as a Beneficiary on Property

A great way to keep assets out of probate is by naming beneficiaries. While there are many types of assets where this can be done, some of the most common that you might name your child on are:

• Life insurance policies

• Retirement accounts

• Pay-on-death bank accounts

• Transfer-on-death investment accounts

But because you are naming a minor child, there may be additional steps that need to be taken before the financial institution will release the funds.

Example: Naming Your Child as Beneficiary of a Life Insurance Policy

Suppose you name your 10-year-old child directly as beneficiary of a life insurance policy, and your will says that Aunt Sarah should serve as custodian for your child’s inheritance. At first glance, this may seem pretty straightforward.

However, this actually creates a conflict because your child can’t legally receive funds directly, and the will can’t legally control the beneficiary designation (beneficiary designations bypass a will completely). Therefore, the life insurance company won’t follow the custodian instructions in the will. Instead, they will follow state law and their own internal procedures and policies.

This means they could delay distribution by asking for such things as:

• Completion of their own transfer paperwork

• A custodial agreement that exists independently from the will

• Tax ID information for the custodial account

Potential Pros of Naming Your Child As a Beneficiary

In some situations, naming your child directly may:

• Keep planning simple

• Avoid the cost of creating a revocable living trust

• Work reasonably well for smaller inheritances

• Be sufficient if the account already includes proper custodial language

Potential Cons

However, if proper planning is not coordinated, possible downsides may be:

• Delays in accessing funds

• Court involvement

• Legal expenses

• Possible disagreements or legal delays regarding who has authority to manage the funds

• Your child receiving full control of their inheritance sooner than you want them to

Key Takeaway: Naming a minor directly as a beneficiary may unintentionally create delays or legal complications if the beneficiary designation is not coordinated with the overall estate plan.

Using a Special Needs Trust

If your child has a disability or may need government assistance in the future, you may want to explore establishing a special needs trust. Often parents create a direct inheritance without realizing that this could reduce or eliminate their child’s eligibility for certain public benefit programs.

A special needs trust, when properly drafted, may help provide financial support for them while still helping preserve their eligibility for these important government benefits.

These trusts are highly specialized and require careful planning with an experienced attorney.

Using a 529 Education Savings Plan

If you want to prioritize educational support, a 529 plan can be a great option to pair with other inheritance planning tools. It is designed specifically for education expenses and may provide tax advantages, depending on the situation and state rules. The funds in this type of plan can often be used for:

• College tuition

• Certain vocational programs

• Books and supplies

• Some K-12 education expenses in certain situations

What About Taxes?

There is always the possibility that inherited assets may create tax liabilities, so this is an important consideration that should not be overlooked. The types of liabilities could be:

• Income taxes

• Investment gains

• “Kiddie tax” issues for a child’s unearned income

• Capital gains concerns

• Gift tax considerations for lifetime transfers

Because tax rules can vary and change over time, larger inheritances deserve professional guidance from an estate planning attorney or tax professional.

Final Thoughts

Planning an inheritance for a minor is really about creating protection, structure, and flexibility during an important stage of life.

A simple custodial arrangement may work well for one family, while another family may benefit from the additional control provided by a trust.

The important thing is understanding that wills, beneficiary designations, trusts, custodial arrangements, special needs planning, and education accounts do not all work the same way — and coordinating them properly can help avoid unintended complications later.

Consulting with a financial advisor and/or estate planning attorney ahead of time will go a long way in helping your family avoid unnecessary stress, delays, and court involvement.