One of the things that I love about my job is helping people with real-world, actual, legal issues. And one that comes up often is parents, or grandparents, asking me how to name their young children, or grandchildren, as beneficiaries for their retirement accounts, life insurance, or payable on death accounts.
Here’s the short answer: Don’t. At least don’t name your minor child/grandchild directly. If you name a minor child directly as the beneficiary for an asset that’s worth more than $5,000, that child will not be able to inherit it without some form of adult supervision because minors are not allowed to own property in their own name that exceeds that limit.
Instead, unless you name an adult as custodian or a trust to manage that property, you will have to get court approval to release those assets to the child. Unless the total amount of the property is $20,000 or less, a Property Guardian will have to be appointed by the court. This Property Guardian will be responsible for managing those assets for the child until that child becomes a legal adult. If the total falls below that $20,000 limit, the court has discretion to order you to hold the money in the way most beneficial for that child.
But, if a Property Guardian is necessary, you will need to file a Petition for guardianship with the probate court and get a court order appointing the guardian. That guardian is under the supervision of the court. What that means is that the guardian will have to provide the court with a detailed account of how the funds were spent and funds on hand one year after the appointment and at least every two years after that and also when the guardianship terminates. It also means that the guardian has to maintain adequate insurance coverage for the assets, keep careful records, and, under some circumstances, get court approval before the funds are spent on that child’s maintenance, support, or education.
The funds must be held in interest-bearing accounts, and the court may require that the funds be placed in what’s called a blocked account, which means that no person can withdraw funds without court approval. Finally, at 18 (or when the minor is adopted, marries, joins the military, or is emancipated by court order) the guardianship terminates (because the child is now an adult), which means that the child now has full control over the money.
Does any part of that sound like a good way to manage a child’s inheritance?
To avoid the oversight, restrictions, and termination at age 18 that come with a Property Guardianship, you have two main options:
1. Name someone as custodian for the money until the age of 25 under the California Uniform Transfer to Minors Act (CUTMA). This is a state law that allows a custodian to hold money for the benefit of a minor in a bank or brokerage account up to the age of 25 (if it’s a gift made at death). The advantages to a CUTMA account are that it is free, widely available, and easy for everyone to understand. The custodian can spend the money for the benefit of the child, without court supervision, and it stays in trust to age 25. The disadvantage is that the terms are standard and can’t be changed and that it has to end at age 25.
Here’s how this would look on a beneficiary form:
Jane Doe, as Custodian, for George Doe, under the California Uniform Transfers to Minors Act, to age 25.”
2. Name a trust that you’ve established, either as part of your Will or living trust, or as a stand-alone trust, as the beneficiary of the gift. The advantage to a trust is that it can have whatever terms you’d like it to have and it can last as long as you’d like it to last. So, for example, if you’d like to limit the use of the gift to the purchase of a house, or require that the money stay in trust to age 30, a trust is your only option.
The disadvantage is that you have to actually have a trust or a Will that’s been executed, and, after your death, that trust will need to get its own tax identification number and be managed by a Trustee.
Here’s how this would look on a beneficiary form:“Jane Doe, as Trustee of the Doe Family Trust, U/A dated May 22, 2004, to the trust created for the benefit of George Doe” (for a trust).
or “to Jane Doe, as Trustee of the trust created for the benefit of George Doe under my Last Will dated May 22, 2004.” (for a trust created as part of a Will).