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 when leaving assets for the children you love.
Common Mistake: Using a Simple Will to Leave Assets to Minor Children
Many parents think a simple will is enough because it states the size of the inheritance their children receive and names a guardian for their children. But a simple will doesn’t control how children receive their inheritance, and in some states is completely insufficient to pass assets to minor children.
States like Texas do not allow beneficiaries under the age of 18 to receive their inheritance directly, but through a protected method, such as a trust. Known in Texas as a 1301 Management Trust, this is a trust created by the court on behalf of a minor child. This is usually done for minors receiving an inheritance through either a simple will or when their parent had no will at all. With a 1301 Management Trust, parents are not able to place guardrails or instructions to the trustee about distribution or milestone rewards. The court usually appoints a corporate fiduciary, such as a bank or trust company, to act as trustee and the trust terminates when the beneficiary turns 18 and is legally able to receive their inheritance, with no restrictions on how the child may use the inheritance.
Even in states which appoint guardians for a minor child beneficiary, the law states that inheritance does not go to the guardian but legally belongs to the children. Minors cannot legally hold more than a small amount of money in their own names. Because of this, the court must appoint someone to manage the funds until the child becomes an adult. The legal adult age is 18 or 21, depending on the state. As with 1301 Management Trusts, in states which have guardians or conservators manage an inheritance for a minor, when the child reaches adulthood, any remaining funds are given to them in one lump sum. There are no restrictions on how the child can use the inheritance at that point.
Caring for your children and managing their money are separate responsibilities. Sometimes the court appoints the same person for both roles. Other times, different people are chosen based on their strengths. Another concern is your child receiving a large sum of money at a young age. Once the inheritance is under court supervision, the conservator must report to the judge regularly. They often need the court’s approval before making certain expenditures. This process can cause delays, extra costs, and ongoing oversight. Many families find this court involvement burdensome.
Common Mistake: Failing to Avoid Court Oversight of Your Children’s Inheritance
A court conservatorship or court created trust for your minor children is a slow and likely expensive process that results in a rigid system with many rules. In most cases, nonordinary 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
While not everyone is comfortable creating Revocable Living Trusts for their families, they can still benefit from preparing trusts for their minor children. A testamentary trust can be created through your will to manage and control when and how your children receive their inheritance, instead of giving it all at once or having a court appoint a conservator. However, it only takes effect after you die and your will goes through probate, which can cause delays, extra costs, and makes your will public—potentially exposing your children’s inheritance to risks.
As mentioned, while not everyone is comfortable with Revocable Living Trusts (RLT), for many families it is the option that fits their goals and priorities best. Like a testamentary trust, an RT lets you choose who will manage money and property for your minor children and how your children receive it. However, unlike a testamentary trust, an RLT 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.
We Are Here to Help
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. Nielsen Law PLLC Provides family-focused estate and business planning to individuals and families in Austin, Round Rock, Cedar Park, and the Central Texas area. For more information, and to learn about our firm, please contact us to learn how.
