Planning Issues with Minor Children
1. How do you name a guardian for minor children in an estate plan?
Parents of minor children should nominate guardians in a properly witnessed Will. In the event of death, when there is no surviving parent, the local probate court would be responsible for appointing a guardian for any surviving minor children. The person nominated in the Will is the likely choice of the court, provided that the nominated person is willing and able to serve after a background check.
2. What methods are available to give inheritance to a minor child?
There are three primary methods for the distribution of inheritance to a minor child.
3. How do the assets get into the trust?
After the death of the parents, an asset may only be contributed into trust for a minor child if the governing document permits it. The governing document may be a Will, living trust, or beneficiary designation. In many cases the governing document will explicitly choose the trust option. For example, a deceased parent’s Will might say, “My personal representative shall retain the share for Child in trust until Child attains age 30.” However, the absence of such language does not necessarily prohibit the use of a trust. There might be a contingency provision in the Will that gives the personal representative the discretion to put a minor child's inheritance into a trust.
A better option may be for the parents to establish a revocable living trust during their lifetimes. In the event of their deaths, the trust may pour its assets into a separate trust for benefit of the child without any probate court action involvement.
4. How does a common trust work?
When there are multiple children, a popular option is to funnel all assets into a “common trust” for the children’s mutual benefit instead of splitting the assets into separate equal shares. The theory is that while at least one of the children is under a specified age (for example, age 23), the trustee should be given the discretion to allocate distributions in the same manner as the parents would if they were alive. Thus, the trustee of a common trust is permitted to sprinkle distributions among the children, not necessarily in equal amounts.
The common trust ends when the youngest child beneficiary reaches the specified age. The trustee then divides the remaining assets into equal shares for the then-living children. If a share is to be distributed to a child under a specified age (for example, age 30), then the child’s inheritance may continue to be temporarily restricted in a managed account or trust. Until the restriction is lifted, a trustee may continue to make distributions for the education and support of the child.
5. May the guardian also serve as trustee?
Parents of minor children should think carefully about whether they want the guardian to also be responsible for managing the inheritance of the minor children the guardian is raising. In many cases, if the guardian is entirely trustworthy and responsible, this is the simplest and best option. However, in some situations it might be better for another person or company to manage the property. This will require cooperation between the trustee and the guardian, but it also provides a check-and-balance system for discretionary expenditures.
6. Who should be the beneficiary of life insurance?
When there are minor children it does not make sense to name them as beneficiaries of life insurance, or any other assets for that matter (Note: an exception may apply here for small amounts). If the parents have a revocable living trust, the trust should be named as the beneficiary so that life insurance proceeds can be paid to the successor trustee, not directly to the children. If the parents do not have a revocable living trust, it may be best to name the probate estate as beneficiary so that the life insurance proceeds can pour into a common trust described in the parents’ Wills.
About the Author
Thomas J. Bouman provides legal counsel in the areas of estate planning, estate administration, and asset protection. He brings a highly systematic approach to the practice of law, which is critically important when wading through the complex, and often bizarre, legal requirements associated with estate and trust law. Mr. Bouman is the author of the Arizona Estate Administration Answer Book and a prominent member of WealthCounsel, the nation’s premiere organization of estate planning attorneys.
Parents of minor children should nominate guardians in a properly witnessed Will. In the event of death, when there is no surviving parent, the local probate court would be responsible for appointing a guardian for any surviving minor children. The person nominated in the Will is the likely choice of the court, provided that the nominated person is willing and able to serve after a background check.
2. What methods are available to give inheritance to a minor child?
There are three primary methods for the distribution of inheritance to a minor child.
- Court-appointed conservatorship. In a conservatorship for a minor child, the probate court appoints an adult as conservator to manage the child’s property until the child turns age 18. The conservator is required to file an annual accounting with the court.
- Custodianship under Arizona Transfers to Minors Act. In a custodianship for a minor child, an adult is authorized by law to manage the child’s property until the child turns age 18 or 21 depending on how the custodianship was authorized.
- Trust. In a trust for a minor child, an adult is appointed as trustee to manage the child’s property subject to whatever terms are specified in the trust document.
3. How do the assets get into the trust?
After the death of the parents, an asset may only be contributed into trust for a minor child if the governing document permits it. The governing document may be a Will, living trust, or beneficiary designation. In many cases the governing document will explicitly choose the trust option. For example, a deceased parent’s Will might say, “My personal representative shall retain the share for Child in trust until Child attains age 30.” However, the absence of such language does not necessarily prohibit the use of a trust. There might be a contingency provision in the Will that gives the personal representative the discretion to put a minor child's inheritance into a trust.
A better option may be for the parents to establish a revocable living trust during their lifetimes. In the event of their deaths, the trust may pour its assets into a separate trust for benefit of the child without any probate court action involvement.
4. How does a common trust work?
When there are multiple children, a popular option is to funnel all assets into a “common trust” for the children’s mutual benefit instead of splitting the assets into separate equal shares. The theory is that while at least one of the children is under a specified age (for example, age 23), the trustee should be given the discretion to allocate distributions in the same manner as the parents would if they were alive. Thus, the trustee of a common trust is permitted to sprinkle distributions among the children, not necessarily in equal amounts.
The common trust ends when the youngest child beneficiary reaches the specified age. The trustee then divides the remaining assets into equal shares for the then-living children. If a share is to be distributed to a child under a specified age (for example, age 30), then the child’s inheritance may continue to be temporarily restricted in a managed account or trust. Until the restriction is lifted, a trustee may continue to make distributions for the education and support of the child.
5. May the guardian also serve as trustee?
Parents of minor children should think carefully about whether they want the guardian to also be responsible for managing the inheritance of the minor children the guardian is raising. In many cases, if the guardian is entirely trustworthy and responsible, this is the simplest and best option. However, in some situations it might be better for another person or company to manage the property. This will require cooperation between the trustee and the guardian, but it also provides a check-and-balance system for discretionary expenditures.
6. Who should be the beneficiary of life insurance?
When there are minor children it does not make sense to name them as beneficiaries of life insurance, or any other assets for that matter (Note: an exception may apply here for small amounts). If the parents have a revocable living trust, the trust should be named as the beneficiary so that life insurance proceeds can be paid to the successor trustee, not directly to the children. If the parents do not have a revocable living trust, it may be best to name the probate estate as beneficiary so that the life insurance proceeds can pour into a common trust described in the parents’ Wills.
About the Author
Thomas J. Bouman provides legal counsel in the areas of estate planning, estate administration, and asset protection. He brings a highly systematic approach to the practice of law, which is critically important when wading through the complex, and often bizarre, legal requirements associated with estate and trust law. Mr. Bouman is the author of the Arizona Estate Administration Answer Book and a prominent member of WealthCounsel, the nation’s premiere organization of estate planning attorneys.