Often, without proper planning, children under 18 years of age become the recipients of cash, life insurance benefits, stock, or other inheritance.
How do we properly and legally distribute the property to a minor?
There are a number of different laws that might be helpful to know about in order to begin exploring the options available. When evaluating the options, you will need to consider the likelihood the child may need the funds prior to 18, the costs associated with the choice, whether there is a substantial risk of misuse, whether the funds will continue to grow, and how tedious the administration of those assets will be.
First, if there’s a Will (and the asset is controlled by the Will and not some other mechanism), the Will can direct who will manage money for the child, the terms of the management, whether there are court oversight and a number of other details. However, a lot of people do not have Wills. Even if you do, in this day and age, the majority of a person’s wealth is often tied up in things not controlled by a Will, such as IRA’s, Life Insurance, and Payable on Death brokerage accounts. A Will is a necessity, but it is sometimes inadequate on its own to plan against the possibility of a child receiving assets, particularly if it fails to consider the possibility of minor beneficiaries. As part of planning, often the use of trusts will prevent this from being a concern.
The benefits to proper planning are reduced costs to administer the assets, reduced or eliminated court oversight, and more control over who will be in charge, the terms of payment, and the ability to increase the age before children get control over their inheritance. Pre-planning for inheritance going to minors is going to always be the best option. This allows the fewest costs of administration, the most opportunity for growth, and the most control over who will be in charge and how the money will be spent.
In North Carolina, the term “guardian” gets used for a lot of different roles, but in this case, it means a person vested with the authority to handle the financial affairs of a minor with assets which then gets overseen by the Court. A guardian of the estate for an unemancipated minor may be appointed to receive and administer property on the minor’s behalf.
Minors are considered to be “legally incompetent” to transact business or give consent for most things, so the use of a guardian of the estate is often the path people take. However, it does come with court oversight, bonding fees (which can be substantial), inventory filings, annual account fees, and tedious annual audits where every receipt, invoice, etc. from the previous year are reviewed.
Many guardians end up hiring attorneys (and a portion of our practice is dedicated to helping people prepare accounts to survive these audits), which eats into the minor’s money. The final concern is that the child must receive the money at 18. If it is a lot of money and you have a child that perhaps lost a parent (not always the case, but often it is when a child is receiving inheritance), it could not only be wasteful to give an 18-year-old his or her inheritance, but it could also be dangerous if the child struggles with the loss in unhealthy ways.
Most proactive planning focuses on avoiding this process because it is not a particularly pleasant thought to imagine government workers taking their pound of flesh out of the wealth you spent a lifetime accumulating and choosing who will be deciding the needs of your child.
However, even if you do not proactively plan (or you are handling the affairs of a person that has passed who did not plan), then here are some popular alternatives to consider:
Year’s Allowance Due to a Child
A rather antiquated law that is still on the books and regularly gets updated to reflect changes in the value of a dollar can be used to avoid the court-monitored guardianship if it’s a relatively low amount of money and other conditions are met. The amount of $5,000 can be paid to the surviving parent in some instances. The purpose of the law was to prevent the impoverishment of a family while a person’s estate is being administered, but it also serves as a technique to avoid administrative headaches. The Court has to approve this process. Sometimes, children over 18 may be able to utilize this option if they meet other criteria.
Payment to the Clerk
The ongoing tedious accountings could be avoided by having the person in charge of the estate pay the minor’s inheritance from an estate directly to the Clerk of Superior Court (the elected Clerk of Superior Court serves as the judge of probate) when the minor does not have a guardian in charge of finances. There is no limit on the amount payable to the clerk. The upside is that no ongoing maintenance is required by family and some costs are avoided, but you do give up control of the asset and there won’t be any effort made to maximize the growth of the funds through investing. This is often a solution for a small amount of money or money being held for a short time.
Uniform Transfers to Minors Act
The Uniform Transfers to Minors Act allows for any type of property up to any amount to be transferred to a custodian for the benefit of a minor. Often this is directed to be done proactively (in a Will for example), but there are instances in which the law allows you to make such a transfer after the fact. In some circumstances, the Court must approve the transfer, which may prove to be challenging because there is no oversight of the use of the funds after the transfer is made. If it has not been directed in advance as part of an estate plan, the Court may be reluctant to authorize this. However, with small amounts of money (less than $10,000), this may be a more viable option to consider.
Distribution to a Parent or Guardian
The person in charge of a deceased person’s estate can make a distribution of personal property owed to a person under the age of 18 directly to a parent or guardian. Recently, the amount allowed to be transferred under this law increased to an amount less than $5,000. This method of transfer has to be approved by a court and can only be used for the education, maintenance, and support of the minor once approved. However, the bond does not need to be given and accountings are not required, both of which are important advantages.
Clerk Administration of $50,000 or Less
Under a separate law which is broader than the previous “payment to the clerk” option that was limited to property in a decedent’s estate, any person in possession of $50,000 or less for a minor under the age of 18 for whom there is no guardian may pay the money to the clerk. If the minor is the named insured on an insurance policy and the insured dies before the minor reaches the age of 18, the proceeds, in an amount not exceeding $50,000, maybe paid to the clerk. The clerk will then make decisions about when to use the money for the child’s benefit depending on what the clerk feels is in the best interest of the child. However, these funds may not be used to replace a parent’s or other responsible adult’s obligations to provide support and maintenance to the child. The clerk may not authorize the disbursement of the funds unless the clerk first determines that the parents or other responsible persons are unable to provide the necessities for the child and the child is in need of maintenance and support. The clerk must require receipts showing that the monies disbursed were used for the exclusive use and benefit of the child. Again, this is a good option for short periods of time and for small amounts of money to avoid ongoing costs, but the loss of investment potential and the loss of control may be deterrents to consider.
The big takeaways from this are:
- Preplanning is always ideal. It gives you a tremendous amount of flexibility in deciding the terms by which children receive the property. Leaving money to a minor directly will almost always cause some sort of complication, so planning for that possibility in advance is the best option. Wills, Trusts, carefully crafted beneficiary designations, and other tools should be maximized prior to death. Our Court system will not often interfere with your decisions if you exercise them in advance.
- If you do not preplan, the Court has a mechanism for dealing with children receiving an inheritance. You probably will not like it though because there are a lot of requirements, a lot of costs, and a loss of control.
- There are several alternatives, but most involve small amounts of money, losing the opportunity to grow the inheritance while the child is a minor, and a loss of control over the terms of payments.
Consult with an Estate Planning Attorney
Whether you are preplanning or trying to figure out how to handle a child’s inheritance after the fact, consulting with an attorney may prove to be advantageous in exploring what options are available and which ones may be the best choice for the specifics of your situation.
Christopher Wilms is an Estate Planning and Probate Attorney. He helps people with the transition of assets after people pass away and planning for the eventuality. He is a member of WealthCounsel, ElderCounsel, the NC Bar Association’s Estate Planning & Fiduciary Law Section and Elder Law Section, and has been a featured speaker on WPTF’s radio show, “Aging Matters.”