29 Mar Options To Consider When Planning For A Minor Who Is A Beneficiary
It is very common for a minor to be named as a beneficiary of a will or trust. However, since a minor is presumed to lack capacity under law until reaching the age of majority, different planning options should be considered. Even when a child reaches the age of majority (18), will the child be mature enough to astutely manage the inheritance? Generally, the answer is “no”.
There are several ways to transfer assets to a minor or someone not mature enough to handle money or assets at your passing as follows:
- Contingent Trust Within Your Will or Trust
Probably the most common planning method is a contingent trust within a will or trust. The contingency is usually based on the age of the beneficiary – at what age do you think the beneficiary will mature? This is typically age 25, 30 or 35 or a portion at reaching certain ages. Normally an adult (i.e., parent of the child or someone else you trust) or financial institution is named as the trustee. The trustee is often given the power to use the trust funds for the benefit of the beneficiary (typically for health, education, maintenance and support). Thus, the assets can be used for the beneficiary until the beneficiary reaches the age of maturity as set forth in your will or trust.
It should be noted that a trustee does not need to be the same person who might be named as the guardian of the person of the minor. Wills often name someone who is to serve as guardian to take care of the child (especially if there is no living parent), but wills should also have a contingent trust if you have a potential beneficiary who is a minor and the trustee named should be someone whom you trust to best manage the assets. Contingent trusts are probably best when the funds are at least $100,000 due to expenses such as filing a tax return.
Even if you have adult children, a contingent trust should be considered in your will or trust since your child could predecease you and there could be grandchildren too young or immature to handle inherited funds. Beneficiary designations should also be considered to avoid unnecessary court involvement.
- 529 Plan
Another common planning option is to make a gift to a 529 plan (pursuant to the Internal Revenue Code) which allows the gifted funds to grow without income taxation if used for qualified education expenses (i.e., college tuition, required books and supplies – although it could be used for primary or religious schools for education or vocational schools). The 529 can even be transferred from one beneficiary to another. For example, if a child does not fully use the funds, then it could be transferred to their sibling, child, etc. This is usually established during the life of the donor although a will could say funds shall be used to establish a 529 or added to an existing 529. The older the beneficiary is, the more conservative investments within the 529 should be. Plans with low expenses should be considered. The account owner is important since they would have the right to change beneficiaries – even to the account owner. A successor account owner should also be named. If the account is not used for qualified education expenses, then there could be taxes and penalties. Also, 529s are more favorable than UTMAs (see below) since the accounts are not owned by the student. Finally, if you are setting up a 529 for your grandchild during your life, you can give up to 5 times the annual exclusion (presently $18,000 per year per done) without incurring a gift tax. In Texas, the maximum lifetime contribution limit is $500,000 (although more than $18,000 per year is subject to gift taxes).
- Uniform Transfers to Minors Act
A Uniform Transfer to Minors Act (UTMA) account can be easily set up in most financial institutions. This is usually used when the gift is small (in comparison to a 529). The account terminates at the age of majority – typically 18 or 21 (depending on the state). At the age of majority, the beneficiary is free to use the funds anyway he or she wants. The custodian of the account can make distributions for the health, education, maintenance and support of the beneficiary. Income on the contributed funds is taxed at income tax rates of the minor. The UTMA account will be considered when determining eligibility for college financial aid. Unlike 529s, there is no 10% penalty for failure to use for qualified education expenses.
Finally, transfers to an UTMA account or an irrevocable 529 account are an exception to Medicaid’s 5-year look-back period since Texas promotes planning for college education. However, if the 529 is revocable, it is not considered a transfer since it can always be changed.
If interested in learning more about this article or other estate planning, Medicaid and public benefits planning, probate, etc., attend one of our free upcoming Estate Planning Essentials workshops by clicking here or calling 214-720-0102. We make it simple to attend and it is without obligation.