Can a minor child be a beneficiary of an asset in an estate?

The answer is yes. However, the problem is a minor child cannot receive the funds or property directly. A probate court will force the creation of an entity, or account, to receive the proceeds on behalf of the child. If the value of real or personal property, not cash, to be received by the minor child is under $100,000, a court will, at the minimum, force the parents to apply to the court for permission to sell the property on behalf of a minor child. This can be done without having to obtain a Guardianship of the Estate of the minor child. However, this will still incur legal fees.

If a minor child is going to receive a life insurance policy, or other type of cash account, worth $100,000 or less, the lowest cost legal alternative to be completed so that the child can receive the funds would be to setup a sequestered account in the clerk’s office. A sequestered account will hold the proceeds in an interest bearing account until the minor child reaches the age of eighteen. At that time, the child will be able to receive all the funds in such account. If a parent needs part of the funds for some expenses for the child, the parent can petition the clerk for a distribution from the account for the expenses detailed to the clerk.

A problem with a sequestered account is that the minor child will receive the funds at the age of eighteen. The child will more than likely spend the funds on a really nice, fast car, or monster stereo equipment, or fancy clothes, instead of spending the money on education or investing the money wisely for the child’s future. Another problem is that the parent has to petition the clerk for money every time there is an expense associated with the child. This can be a hassle after awhile. If the proceeds of a life insurance policy, retirement plan, or other type of asset such as a certificate of deposit or securities account, are over $100,000, then a probate court will force the creation of either a 867 Management Trust or a Guardianship of the Estate for such minor child. A corporate trustee will be appointed to manage such trust or guardianship with the result that corporate fees will have to paid out each year. If the investments in the account do not pay more than the fees, then such fees will eat into the proceeds of the account before any distributions are made to the minor child.

A solution to all of the problems stated above would be to create a trust for the benefit of the minor child and have all the assets, which the child is to receive, paid into this trust. Any type of asset can be paid or transferred into a trust for the benefit of a minor child. With such a trust, someone else can be named as the initial Trustee to manage the trust on behalf of the minor child and pay out the proceeds for the child’s health, education, benefit, and welfare. This creation of this trust will ensure that the minor child does not waste the monies on foolish actions which will have no value in the child’s future.

With such a trust, you, as the creator of the trust, can determine when, if at all, the child will obtain control over the trust assets for distribution decisions. For example, a child can become Co-Trustee of his or her own trust upon attaining the age of twenty-five and sole Trustee of his or her own trust upon attaining the age of thirty. You can put any age you want into the trust terms. Additionally, if such a trust was held for the lifetime of the child with remainder to the child’s surviving issue, then such a trust would be: (1) protected from creditors; (2) kept as separate property in the event of a child’s divorce; (3) won’t be taxed in the child’s estate for estate tax purposes; and (4) will continue to be held in trust for the benefit of the child’s surviving issue without having to go through probate.

A special power of appointment can be given to a child in a trust. This special power will give the child the ability to leave his or her trust, outright, or in trust, to anyone related to such child by blood, adoption or marriage, or to any charity. You, as the creator of the trust and the special power of appointment, can limit the power as you wish.

The reason why a special power of appointment should be given to a beneficiary of a trust is due to the uncertainty of future events in that beneficiary’s lifetime. For example, if your child has three children and one of those grandchildren is born handicapped, or is involved in an accident which makes that grandchild a special needs child, then you would want your child to be able to leave the portion of the trust estate going to that disabled grandchild to a special needs trust. This type of trust will ensure that the disabled grandchild will still be able to receive government assistance while having the trust assets available for any expenses not covered by such assistance. If the disabled grandchild received the proceeds of the trust outright, or in a trust which did not contain special needs language, then such trust assets would more than likely be counted against the grandchild in the eligibility requirements for receiving the government assistance. This means the grandchild would not be able to receive the government assistance until the assets in the trust were depleted.

If a trust is named as the beneficiary of a retirement plan, then the retirement plan proceeds will be paid out over the lifetime of the oldest living beneficiary of the trust. With such a trust, there must be restrictions in the trust pertaining to how the retirement plan proceeds are paid out for the benefit of the child. One of the restrictions which must be applied to a trust containing a retirement plan payout must state that the beneficiaries of the trust are restricted from leaving the remainder of the trust assets to any beneficiary older than the initial beneficiary. This restriction ensures that the payout over the lifetime of the beneficiary will not be effected due to an older individual being the beneficiary of the trust after the death of the initial beneficiary.

As you can see, creating a trust which will hold all assets distributed to a minor child is the way to go as it solves numerous legal problems and is less costly in the end. Such a trust can also be utilized for an adult beneficiary.