Leaving an Inheritance to Young Children

You need to consider many things when creating your estate plan . . . .  Who would get your favorite family heirloom?  What would be the best way to transfer your house to your spouse? How would your retirement accounts be taxed? And if you have young children, who would care for them? 


Most people plan on leaving an inheritance to their children, but many fail to consider how they will give it to them. Giving it outright is not always a great idea . . . have you ever seen an eighteen-year-old with a $100,000 check?  I have. The result of this type of windfall is about what you’d expect. Not everyone realizes that you have a choice about when your kids will receive your money. The money can be doled out over a period of years, or for specific things like college, a down payment on a home, funds for starting a business, or for emergency medical care. You can accomplish this in a very straightforward way by creating a testamentary trust in your will document.

Keeping Control

Testamentary trust provisions allow you to control your money even after you are gone.  The provisions create a trust entity that will be managed by the trustee, who is an individual (or sometimes a professional trust company) that you choose.  The trustee works with your child or the child’s guardian to pay for certain expenses which you specify in the trust document. 


Eventually, at a time you’ve determined, the trust pays out its remaining balance; this could be when the beneficiary is twenty-five, thirty-five, fifty, ninety, or any age in between.  Funds could also be left in the trust for the child’s whole life, and then paid out to the next generation (or held in trust for them too).  You can also attach conditions to the money, such as a bonus distribution upon the completion of a college degree, or instructions to keep funds out of the hands of a child who is struggling with substance abuse.  Provisions can be drafted that will prevent the trustee from distributing the money if the child is going through a divorce or a bankruptcy, thereby protecting the child’s inheritance from these proceedings.

Expensive Mistakes

If you leave money to a minor child outright — either through your will or by listing the child as a beneficiary of your financial accounts or life insurance policies, you could be making a very expensive mistake.  Rules vary by state, but funds left outright to minors are held by the probate court and administered by a conservator.  This isn’t cheap, and the court will give the child the funds outright when he or she turns eighteen (sometimes twenty-one, depending on the circumstances).  I have watched eighteen-year-olds spend their entire inheritance within a year on cars, electronics, and misplaced generosity to their friends. I don’t mean to generalize the behavior of an entire group of people based solely on their age, but I look at myself at eighteen and I look at myself now, and I can tell you unequivocally that a windfall of cash would be handled much differently today than it would have been handled when I was a teenager.

A word of caution: these provisions must be drafted in a very specific way if they are to qualify with the IRS to receive retirement plan funds, and the other provisions in the will have to be very specific as to how the trust will be created and how it will be managed.  This is not a do-it-yourself project.  Drafted properly, these provisions can ensure that your children will be set to succeed and will have access to these funds for a lifetime.  Set up improperly, and you can disinherit them altogether.

Philip J. Ruce creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees. available at Amazon.com in paperback or Kindle edition (free chapter available here!) He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.Keywords: trusts and estates, Minnesota wills, revocable trusts, estate attorney, probate, estate planning, will