If you want to leave an inheritance to a child who is a minor when you are planning your estate, you have to empower an adult to manage the assets until the child reaches the age of majority. In addition to this scenario, some people want to proactively build savings that a child can access in the future.
With this in mind, let’s look at solutions for individuals who want to provide an inheritance for a child.
First Things First
You should have an estate plan in place as soon as you have a family that is depending on you. People pass away at young ages every day, and there are no guarantees. When you take steps to provide for your loved ones, you are taking the responsible path.
If you have a revocable living trust, you would be the trustee while you are living. You and your spouse could potentially establish a shared trust if you are married, and you could act as co-trustees.
When you draw up the trust declaration, you name a successor trustee to administer the trust after your passing. This individual or professional fiduciary would be empowered to manage assets on behalf of a minor child if necessary.
A testamentary trust is a trust that is contained within a will. It would be created after the passing of the testator. This type of trust can be used to designate an adult administrator who would handle an inheritance for a child.
Of course, many younger people have not had enough time to accumulate significant resources, and the needs of a child who is a minor may be considerable. Life insurance can provide a solution, and a trust for the benefit of that minor can be the beneficiary of a life insurance policy.
UGMA/UTMA Accounts
There are tax benefits if you utilize a custodial account to accumulate resources for the benefit of a minor. The Uniform Gifts to Minors Act (UGMA) was originally released in 1956, and it was updated in 1966 to reflect changing circumstances.
A UGMA account can be used to hold resources for a minor child, and it is called a custodial account. The custodian is an adult asset manager who has responsibilities that are similar to the trustee of a trustee.
This type of account can hold stocks, bonds, mutual funds, ETFs, and cash. There are no contribution limits, and different people can make contributions to the account. The assets can be used for any purpose that benefits the child, and there are tax benefits.
The Uniform Transfers to Minors Act (UTMA) was enacted in 1987. UTMA accounts are identical to UGMA accounts with one exception.
Any type of property can be held by a UTMA account, so you can transfer real estate or valuable fine art into this type of account.
A 529 college savings plan can be a better choice to save money for a child’s education. As long as the assets in the account are used for qualified education expenses, there is no taxation on the accumulated growth. You can change your mind and take back possession of the assets after you fund the account. However, there would be penalties and fees. From a financial aid perspective, the assets are not considered to be the property of the student.
Originally, funds in a 529 savings plan could only be used for college expenses. When the Tax Cuts and Jobs Act was enacted at the end of 2017, there was a provision that broadened the scope. Up to $10,000 per year can now be used to help cover K-12 education expenses.
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There is no one-size-fits-all estate plan that is right for everyone. Each situation is unique, and people have different capabilities and priorities. Personalized attention is important, and this is what you will receive when you choose our firm.
If you are ready to get started, you can call us at 918-615-2700 to schedule a consultation at our Tulsa, OK estate planning office. The number for our location in Oklahoma City is 405-843-6100. We also have a contact form on this site you can use to send us a message.
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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