With so much disagreement nowadays, here is one thing we can all agree on:
Leaving money outright to a minor child is a really bad idea.
It is such a bad idea, in fact, that most judges will take extraordinary steps to tie up the money for as long as the law permits rather than see it be squandered by a shiftless parent, guardian or 18-year old.
So if there is universal agreement, then how does such a misstep occur?
It is pretty simple, really. A parent dies without a written will (what young parent ever thinks of his or her own mortality?), or a parent, grandparent, aunt, uncle or other well-meaning adult names a minor child, or a class that contains minor children, as a beneficiary in a will, financial account, or retirement account.
So what should you do if you intend to leave assets or money to a minor child?
Make an estate plan that includes a trust. A trust is basically an agreement among three parties – the trust creator, the trustee, and the beneficiary. The trust creator is you. The trustee is a person or corporate entity who has the responsibility to invest the assets in the trust and periodically disburse them. The beneficiary is the minor child.
You will definitely want to include some protective provisions in any trust with a minor beneficiary.
An incentive provision can prevent the child from becoming a spoiled “trust fund kid.”
You can tie distributions to requirements that the child obtain an education, volunteer for charitable causes, work, or demonstrate the ability to handle money.
A spendthrift provision can prevent the child from throwing his inheritance away to pay debts or getting into other legal trouble. It voids the child’s ability to assign or pledge his interest in the trust and prevents creditors from reaching into the trust.
A ‘bad behavior” clause can penalize the child for excessive spending, abuse of drugs or alcohol, or being involved in criminal activities. It allows the trustee to pause distributions to the child until the child stops the bad behavior and successfully rehabilitates. The clause may permit the trustee to pay for the rehabilitation.
A stand-by supplemental needs provision covers a situation where the child may be disabled or incapacitated and needs governmental aid and assistance. It allows the trustee to convert a trust that may otherwise disqualify the child from that aid. The trustee will still be able to supplement the child’s needs that are not covered by the governmental aid.
Finally, you should put careful thought into who will serve as the trustee.
For family harmony, it is better to choose a corporate trustee and then have a family member serve as a “trust protector” who can step in to change out trustees or modify certain trust terms if things go awry.
A trust is a simple solution that allows you to leave a thoughtful legacy and still protect the minor child from himself and others who might exploit him.