Central to the core of inheritance is our desire to leave our financial legacy to our children and grandchildren. A life filled with ambition, mistakes, successes, and hard work can pave the way to much wealth and fortune – but there is no way to enjoy any of that after we have passed on, and the law is typically far too uniform for many when it comes to the distribution of assets after death.
But you cannot simply bequeath a portion of your estate to your favorite grandchild or nephew, especially if they are far too young to even understand what bequeath means, let alone manage a financial fortune. The law categorically forbids minors from holding onto real wealth through inheritance – but that does not mean you cannot take steps to ensure that your descendants get what you planned for them to possess once they are old enough to accept the financial responsibility that may entail.
It may be irresponsible of you to simply assume that if you bequeath your wealth to the guardians or parents of your minor beneficiaries, they will ultimately receive the inheritance you planned for them. Writing it as a note into your will is not the wisest or most legally-sound option, either. Thankfully, there are several estate planning strategies to adopt here, depending on the circumstances and sums in question.
A good idea in most cases is to talk to your children about your estate plans and discuss inheritance with them. If your wish is to ensure that a portion of what you leave behind goes towards your minor beneficiaries – typically your children’s children, nieces, and nephews – then the easiest way to organize this is to let your children know and talk to them about ways to potentially arrange for certain assets and wealth to pass onto your grandchildren when they come of age, or when they are financially responsible.
Your children could hold onto a certain property or asset and either gift it to their children or write it into their own estate plans.
Of course, if your plan is to ensure that a portion of your fortune passes onto your grandchildren once they come of age, then simply passing it onto your children might not be the best idea. It is not financially or legally easy to move a fortune from one person to another, without taking a massive tax hit. There are other ways to organize your inheritance in such a way that your minor beneficiaries will benefit.
If you want to ensure that you minor beneficiaries get something when they are grown up, locking it into a trust until they come of a certain age is a great way to do so. By creating a trust and funding assets into it, you get to control a great many things – for example, you can choose how much control the trustee has over the assets in the trust once you pass away, and you can even choose to bequeath only a portion of the assets in the trust at a time – giving your beneficiary sum after sum every five years over the course of two decades, for example.
Age is not the only way for your beneficiaries to unlock assets. You may, for example, create a different condition, such as graduating college, successfully starting a business, or some other clearly defined goal.
Passing assets on this way, however, leaves your beneficiary vulnerable bad decisions, or to spouses seeking a divorce and a claim to the inheritance. A trust like this can also be very expensive to set up and maintain, as it usually involves the active service of a professional or a financial institution, and legal costs.
An alternative to a staggered trust is a dynasty trust. While also managed entirely through a third party – usually a bank, or some other financial institution – a dynasty trust’s marked advantage is the fact that its assets are never fully within the beneficiary’s control, and thus never count as part of the beneficiary’s assets or estate, thus negating the danger of having your grandchildren fall prey to forces out to lay claim to their inheritance.
It also has a marked benefit for you, the grantor of the trust. As an irrevocable living trust, all assets flowing into a dynasty trust are no longer your own and do not count towards your estate tax exemption. The same goes for your beneficiaries, as they do not inherit all the assets within the dynasty trust, but instead receive a managed and pre-determined sum over a course of time.
This way, you can continue to supply your family with wealth over several generations after you have passed away, without incurring tremendous tax costs upon yourself or your descendants.
Not all estates require meticulously crafted trusts to solve this problem. If the total value to be left to a minor beneficiary is relatively small, a UTMA (Uniform Transfers to Minors Act) account can be utilized instead of a trust. There is no contribution limit for a UTMA, but as it is subject to gift tax, it may be best to keep the numbers low – in most cases, under $20,000.
In California, the age limit for a UTMA (or more clearly, the limit as to when the account will be dissolved, and its contents passed onto the beneficiary) is between ages 18-25.
Typically, a UTMA account is created after the decedent passes away, at which point the surviving spouse or the decedent’s children can request that part of the minor’s inheritance – as per the decedent’s will – is held in a UTMA until they come of age.
A charitable trust – or more accurately, a charitable remainder trust – allows you to assign part of your wealth to charity until you die, at which point the remainder of the trust may be passed onto your children. You can utilize such a trust to lower the size of your estate for tax purposes, while leaving a sum for your minor descendants, held in trust until they reach the age of majority.
There are other ways to pass on your inheritance to your minor beneficiaries, including the use of IRAs or life insurance trusts. Ultimately, it is wisest to call a professional before making any decisions regarding the future of your estate, and your beneficiaries.
If you have minor beneficiaries and want to ensure that a part of your wealth goes towards them when you pass away and they are of age, then a legal professional can work with you to find a way to do so, with as little cost and as much efficiency as possible. A reputable professional estate planner may also give you advice on how to simplify your estate plan, preventing monetary loss and saving your family time and stress in the future.
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