While you always want to be sure your estate plan is properly prepared and executed, it can be a little tricky when you’re making a gift to a child in your estate plan. Maybe you have a grandchild or a favorite niece or nephew who you’d like to help with college costs once you’re not around. In the case of a special needs child, you may want to help with medical expenses or provide a little extra financial support. What you need to know, though, is that minors generally can’t receive money or property legally until they turn 18. This can cause all sorts of headaches down the road if you don’t plan for it now.
In addition, some financial custodians – which includes banks, IRA companies and life insurance companies – will not release funds to minors unless someone sets up a guardianship account to receive funds. Of course, you have to hire an attorney and go to court to do this. As a result, your gift can wind up going toward legal fees and court costs, instead of to your loved ones.
To avoid this, it’s important to work with an experienced attorney to help you properly set up a trust for your minor beneficiaries (a.k.a., the kids you want to leave money to). Here’s how to skip the tricks and ensure the treats you intend.
When you leave money to a child directly in your will, the court may not permit the estate to distribute the property to the minor directly. To access the funds, their parent will need to go to court to set up a guardianship to claim it. This is an annoying and expensive process, costing an average of $5,000 – $10,000.
Guardianship procedures involve:
- filing a case in the probate courts (“probate” incudes both administering estates at death and guardianships)
- appointing a guardian ad litem (that is, another attorney you have pay) to review the situation and give recommendations to the court
- setting up special guardianship accounts and filing income taxes on those accounts
- filing accountings until the child is legally of age
- posting a surety bond (yet another expense), which is the court’s way of ensuring they don’t steal the inheritance.
Once the guardianship is set up, the appointed guardian controls the money for the child based on a budget the court approves. Any expense beyond the budget requires court approval (and more attorneys’ fees). For example, say that you leave your grandchild $10,000 in your will. All or most of that could easily be eaten up in legal fees and court costs trying to claim it, which of course isn’t what you intended. The only other option for your beneficiary is to have the money sit in an account until they turn 18. That may be fine if the child is only a year or two from being an adult, but it could cause issues if they’re very young. Under Illinois’ unclaimed asset laws, if the money isn’t claimed within a specified time frame, it will eventually go to the state as unclaimed property, rather than to your loved one.
Avoiding problems with a trust
Fortunately, you can avoid most of these challenges by setting up a trust that includes your grandchild, niece, nephew or other child you plan to gift. You can have your will set up the trust (the will is much longer than normal since it contains trust provisions) or have your own living trust set up a trust for the minors on your death.
You’ll need to appoint someone who doesn’t have creditor issues to act as the trustee and manage the trust. Then, when you gift the money, you’ll designate the trust as the beneficiary. That allows the trustee to access funds on the child’s behalf to pay for healthcare, education, living expenses or other needs – just as you intended.
Creating a trust for beneficiaries in your will (or your own trust) not only helps protect assets for your beneficiaries, it can provide benefits for them for generations. To make sure yours is set up properly, talk to an estate planning attorney. The cost of working with a professional is far less than the expense and heartache your family will face trying to sort things out later.
Need a hand avoiding the tricks of treating your own grandchildren or other minors? We’re here to help.