Why I Would Never Leave an Inheritance Directly to a Minor Child in North Carolina
Most parents spend a lot of time thinking about who should inherit their assets and very little time thinking about how those people should inherit them. That is especially true when the beneficiaries are children or grandchildren.
I will sometimes meet with parents who tell me, “If something happens to us, everything goes to the kids.” The intention is exactly what you would expect. They want to make sure their children are financially secure, have money for college, are cared for by people they trust, and have every opportunity their parents would have given them if they were still here.
I completely understand that goal. But, I would never recommend leaving a substantial inheritance directly to a minor child.
Not because the child shouldn’t inherit. Quite the opposite. If you are leaving money for a child, I want that inheritance to actually accomplish what you intended it to accomplish.
And simply naming a minor child as a beneficiary can create problems that most parents never see coming.
A Minor Child Cannot Simply Take Control of an Inheritance
Imagine that a married couple with two young children has Wills leaving everything equally to their children if both parents die. It sounds perfectly reasonable. But, their 9-year-old cannot walk into the bank with a death certificate and say, “I’m here for my half.”
A minor generally cannot independently manage inherited property. Someone else will have to manage that property on the child's behalf, and how that happens depends in part on how the estate plan and beneficiary designations were structured.
If the parents planned ahead, they can have significant control over who manages the inheritance and how the money may be used. If they did not, North Carolina law may end up providing the solution for them. That is rarely my favorite estate-planning strategy.
The Court May Have to Get Involved
When property passes directly to a minor without an appropriate trust or other arrangement already in place, court involvement may be necessary to determine who has authority to manage the child's property. That can mean additional filings, expenses, oversight, and administrative requirements at a time when the family is already dealing with the loss of a parent.
More importantly, the person handling the child's inheritance may not be the person the parents would have chosen. This is one of the reasons I tell parents that naming a guardian for their children is only part of the planning process.
You also need to decide:
Who should manage the money?
Those two jobs do not necessarily have to belong to the same person.
Your sister may be the perfect person to raise your children but terrible with money. Your brother may be wonderful with investments but have absolutely no desire to parent a 7-year-old.
That is okay. A thoughtful estate plan allows you to choose the right person for each job.
Then Comes the Bigger Problem: What Happens When the Child Becomes an Adult?
This is where many parents really start paying attention. Even if an adult successfully manages the inheritance while the child is a minor, eventually the child reaches the age when the law says the property belongs to the child.
And there is a big difference between being a legal adult and being financially prepared to manage an inheritance. Think about yourself at 18.
Now imagine someone handed 18-year-old you a check for $250,000. Or $500,000. Or $1 million.
Would you have made the same financial decisions at 18 that you would make today? I know I wouldn't want to bet an entire inheritance on it.
Most parents who come into my office aren't imagining their teenager receiving a large check. They are imagining the money being available for college, housing, healthcare, transportation, graduate school, a first home, or whatever else their child genuinely needs as he or she grows into adulthood.
A properly designed trust can do exactly that.
Leaving an Inheritance in Trust Does Not Mean Your Child Cannot Use the Money
Sometimes parents hear the word “trust” and picture money sitting in a vault somewhere while their child desperately waits until age 35 to touch it. That is not how a well-designed trust has to work.
A trust can allow the trustee to use the inheritance for the child's needs while still protecting the larger inheritance.
For example, the trustee might be authorized to pay for:
Tuition, books, housing, and other education expenses
Medical and dental care
A reliable vehicle
Housing and living expenses
Activities, camps, lessons, and extracurricular opportunities
Travel or study-abroad programs
Professional training
Starting a business
A down payment on a home
Other expenses that help the child become a healthy, independent adult
The goal is not necessarily to keep the money away from your child. The goal is to make sure the money is available for your child without putting the entire inheritance into your child's hands before he or she is ready for it. That is an important distinction.
You Can Decide When Your Child Receives Control
This is one of my favorite things about trust planning. You can design the inheritance around your family's values rather than simply relying on an arbitrary birthday.
Some parents like staggered distributions. For example, a child might receive part of the inheritance at 25, another portion at 30, and the remainder at 35.
Other parents decide they don't want mandatory distributions at all. Instead, the inheritance can remain in trust for the child's lifetime, with the child eventually having greater control over the trust as he or she becomes older and more financially mature.
There isn't one magic age that works for every family. The right question isn't:
“At what age should my child get the money?”
The better question is:
“What do I want this money to accomplish for my child?”
Once we know the answer to that question, we can build the estate plan around it.
A Trust Can Protect More Than Financial Immaturity
There is another reason I like trusts for children, and this one becomes even more important as children grow up. Protection.
Your 8-year-old may not have creditors today. She probably isn't getting divorced. Hopefully she isn't making terrible financial decisions.
But someday she will be 28. Or 38. Or 48. Life happens.
Depending on how the trust is designed and administered, assets remaining in trust may have protections that assets distributed outright to the beneficiary do not. That can matter if your child later experiences a divorce, lawsuit, creditor problem, bankruptcy, substance-abuse issue, financial exploitation, or simply a period of poor decision-making.
Once money is distributed outright, many of those protections may disappear. That is why I often encourage parents to think beyond childhood when we are designing an inheritance.
We aren't just planning for the child you have today. We're planning for the adult that child will someday become.
What About Life Insurance and Retirement Accounts?
This is another place where parents can accidentally undo a beautifully drafted estate plan. You can have a wonderful Will or Revocable Living Trust that creates carefully designed trusts for your children and then name the children directly as beneficiaries of a life insurance policy or other account.
The beneficiary designation generally controls where that asset goes. That means your estate plan needs to coordinate your Will, trust, life insurance, retirement accounts, and other beneficiary-designated assets.
I don't want my clients leaving my office with a beautiful binder full of documents that say one thing while their beneficiary designations say something completely different. The documents have to work together.
“But My Children Are Adults Now.”
This conversation doesn't necessarily end when your children turn 18. In fact, some of my favorite estate-planning conversations happen when parents tell me:
“My kids are adults. They're responsible. Why would I leave their inheritance in trust?”
Because a trust isn't necessarily about whether you trust your child. It may be about protecting the inheritance.
Your 35-year-old daughter may be incredibly responsible. She may also someday go through a divorce.
Your 42-year-old son may be financially successful. He may also own a business that creates liability exposure.
Your adult child may develop health problems, become disabled, experience creditor issues, or simply go through an unexpectedly difficult period of life.
An inheritance held in a properly structured trust can potentially provide options and protections that an outright inheritance cannot. So when I talk about not leaving an inheritance directly to a minor child, I'm really talking about something bigger.
How can we leave an inheritance in the most useful and protective way possible?
Your Estate Plan Is Your Last Opportunity to Parent
I think this is the part that gets lost when estate planning becomes a discussion about documents, percentages, trustees, and legal terminology. For parents of young children, an estate plan is much more personal than that.
If you aren't there, your estate plan has to speak for you. It tells the people you trust:
Use this money for her education.
Make sure he has a safe place to live.
Let her study abroad if she has the opportunity.
Help him buy his first home.
Give them opportunities, but don't hand them everything at 18.
Protect what we spent a lifetime building for them.
You don't need to predict every decision your children will make for the next 30 years. You couldn't do that even if you were standing beside them. But, you can create a framework.
You can choose the people you trust. You can give those people guidance. And you can make sure an inheritance intended to create security and opportunity doesn't accidentally become a financial burden handed to a child far too soon.
The Happy Lawyer Takeaway
If you have minor children or grandchildren in your estate plan, take a look at more than just who receives your assets. Look at how they receive them.
Ask yourself who would manage the inheritance if the child were still young, what the money should be available for, when the child should have greater control, and whether you want the inheritance protected beyond the child's eighteenth birthday.
Because leaving money for a child and leaving money to a child are two very different things. And when we are talking about the assets you spent a lifetime building, and the people you love most, that difference matters.
We Can Help
If you have minor children or grandchildren, or if your current estate plan simply says that your children receive their inheritance outright, it may be worth taking another look at how that inheritance is structured.
At Mackintosh Law, PLLC, we help North Carolina families create estate plans that do more than name beneficiaries. We help you think through who should manage an inheritance, how the money should be used, when your children should receive control, and what protections may make sense for your family.
Your children may be too young to manage an inheritance today. Your estate plan doesn't have to be.
Ready to make sure your plan protects the people you love? Contact Mackintosh Law, PLLC to schedule a free Discovery Call.
You can call (919) 336-4219 to schedule your call.
This article is provided for general educational purposes and is not legal advice. Estate-planning laws and individual circumstances vary. You should consult with a qualified North Carolina attorney regarding your particular situation.
