Avoid These Common Mistakes When Leaving Money to Your Minor Children

You love your children and want to ensure that they are always taken care of. The desire to provide for them may also be shared by their grandparents, aunts, and uncles. However, when leaving money and property to minor children, even the best intentions can lead to big problems. Common mistakes can cause chaos for your family. Here is what you need to know to protect and provide for the children you love.

Common Mistake: Using a Simple Will to Leave Assets to Minor Children

Many parents assume that a simple will is all they need for their estate plan since that is where they can nominate a guardian for their minor children.^[1] However, how the inheritances for the children will be handled often gets overlooked. A simple will requires that beneficiaries (even children) receive their inheritances outright in one lump sum. While most parents would prefer that their children receive an inheritance gradually—perhaps at certain ages or milestones—a simple will does not provide that kind of flexibility. Instead, once your child becomes an adult, the law requires the inheritance to be handed over in a single lump sum with no strings attached. Many parents assume this requirement will not be a problem because they believe that the guardian in their will can manage the inheritance for their child’s care.

Unfortunately, that is not how the law works. The inheritance does not automatically flow to the guardian but instead legally belongs to the children. And because minors cannot legally hold more than a small amount of money in their own names, the court must step in to appoint someone to manage the funds until the child becomes a legal adult (at age 18 or 21, depending on the state). At that point, whatever is left is turned over to the child in one lump sum with no restrictions. 

The responsibilities of caring for your children and managing their money are separate and distinct. The court sometimes appoints the same person to handle both. Other times, different people are chosen depending on their strengths. In addition to the concern about your child receiving a large sum of money at a young age, there is another complication: Once the inheritance has come under court supervision, the conservator must regularly report back to the judge as to how the money is being used for your child’s benefit. In many cases, they will also need to obtain the court’s prior approval before certain expenditures can be made, which can add delays, extra costs, and ongoing oversight that many families find burdensome.

Common Mistake: Failing to Avoid Court Oversight of Your Children’s Inheritance

A court conservatorship for your minor children is a slow and likely expensive process that results in a rigid system with many rules. In most cases, non-ordinary expenses (those beyond medical, educational, and normal living expenses) must have prior court approval. Because the court must apply the law the same way in every case, it cannot easily make exceptions for your child’s unique needs. For example, if your child would benefit from extra tutoring or specialized therapy, the court cannot automatically allow those expenses; it would require a separate request and approval process.

Keep in mind that every time the conservator must go to court, there are court fees. The conservator may also be entitled to compensation for the time they spend handling the matter, and an attorney will likely need to be involved as well. All these expenses come directly out of your children’s inheritance.

Correct Action: Using a Trust to Protect the Child and Their Inheritance

So what is a better way? Quite simply, using a trust. One way to use a trust is to create one in your will. Called a testamentary trust, this type of trust allows you to name someone to manage the inheritance (rather than having the court appoint a conservator) and decide when and how your children will receive their inheritance (rather than receiving it in one lump sum when they become a legal adult). However, this type of trust comes into existence only after you die and the will goes through probate. Probate is a court process that can cause delays and expenses that reduce the amount of money available for your children. In addition, because the details of your will and testamentary trust are made public during probate, everyone—including people who might try to take advantage of your children—can see what they inherited.

For most families, a better option is to use a revocable living trust. Like a testamentary trust, it lets you choose who will manage money and property for your minor children and how your children receive it. However, unlike a testamentary trust, a revocable living trust comes into existence immediately when you create it, so it can govern how your children receive financial support from you when you are deceased or if you are still alive but become unable to manage your own affairs. Another major advantage of a revocable living trust over a testamentary trust is that it is a private plan that does not require court involvement.

With a living trust, you have total control to

• choose the exact age or milestones, such as graduating from college or buying a first home, when your children will receive their inheritance;

• provide for each child’s specific needs and circumstances; and

• protect the inheritance from your children’s creditors, divorcing spouses, or poor spending decisions.

A living trust can give your children the continued protection you currently provide them long after you are gone. By using a trust, you are not just leaving a gift; you are protecting what you have worked so hard for, for their benefit.

These common mistakes can put your children’s future at risk. Let us create a plan that works exactly as you intend. Call us today at 301.892.2713 or click here to schedule a complimentary Estate Planning Discovery Session to learn more about how a revocable living trust can protect the people you love most.

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This article is for educational purposes only and should not be considered legal advice.

^[1] Some states (e.g., Maryland) use the word guardian for both roles, while other jurisdictions (e.g., the District of Columbia) distinguish between a guardian (who provides care for the child) and a conservator (who manages the child’s money). To clearly distinguish the two roles, this article uses guardian to mean the person caring for the child and conservator to mean the person handling the finances.