When Minors Are Beneficiaries
Protections are in place until a child reaches legal age
Minors can be beneficiaries, but they can't legally own their property until they come of age. What happens when you leave an inheritance to a beneficiary who is still a minor depends on the nature of the bequest and state law.
Minors as Beneficiaries of Direct Gifts
When property is left directly to a minor beneficiary, such as through joint ownership of property or a payable-on-death account, the minor won't have the legal authority to take control of it because of their age.
The same holds true for inheritances received via a last will and testament or from an intestate estate—when the deceased died without a will—or a living trust was drafted improperly, so its terms were not honored.
In this case, state law determines who should receive the decedent's estate and in what measures. Typically, the closest kin will inherit the property. The estate will only go to more distant relatives if there is no spouse or children.
What happens to a minor's inheritance in these cases depends on the laws of the state where the minor lives and the value of the bequest.
UTMA, UGMA and 529 Accounts
If the value of property left to the minor is not significant, usually $20,000 or less, state law may allow an interested adult such as the minor's parent or grandparent to request that the minor's inheritance be placed in an account established under the state's Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA).
These accounts can hold the funds for the child until they reach the age of majority—18 in most states, but sometimes 21. Also, some states allow an interested adult to request that the property be placed in a 529 account for the benefit of the minor. This is a tax-advantaged savings plan to help pay for future college costs or private school tuition in primary and high school.
In some states, a parent can personally assume management of very small amounts, such as gifts of $5,000 or less from a grandparent or other adult, on behalf of their minor child. The parent would not have to use a specialized UTMA, UGMA, or 529 account in these cases.
Conservatorships for Minors as Beneficiaries
If the asset value left to a minor is more than can be placed in a UTMA, UGMA, or a 529 account, or if the laws of the state where the minor lives don't authorize these types of accounts for inherited assets, a court-supervised conservatorship must be established for the benefit of the minor.
The court-appointed personal representative or executor of the estate will file a petition requesting that a conservator be appointed on behalf of the minor to manage the inheritance when a probate estate has been opened. If there is no probate estate, such as if the minor being named is the beneficiary of a life insurance policy or retirement account, then an interested adult can file the petition.
The interested adult could be an aunt or uncle, but does not have to be a relative. The important thing is that it's someone who can be trusted.
A judge will then decide who to appoint as the minor's conservator after hearing testimony from all interested persons, sometimes including the minor if they are over a specific age, usually 12 or 13. The exact age is determined by state law.
In most cases, the child's parent is chosen to be conservator unless both parents are deceased or otherwise determined to be inappropriate or incapable of performing the duty
The appointed conservator will take over management and control of the minor's inheritance until the minor becomes an adult. Parents leaving inheritances to their minor children can avoid a lot of this difficulty by naming a conservator in their estate plans.
The Bottom Line: Maturity
Even if a child is at the legal age to be a beneficiary (whether that's 18 or 21), the child may not have the maturity to manage a large amount of money. This is why many parents in their estate planning establish trusts that a child cannot touch until they are older. For instance, children with addiction issues that would make it likely for them to squander the money recklessly are also candidates for this type of plan.