Can a Minor Be a Beneficiary?

A minor can generally be named as a beneficiary of an inheritance, life insurance policy, retirement account or other asset. The complication is that children typically cannot control inherited property or certain financial accounts themselves while they are still minors. Depending on the asset and applicable state law, a guardian, custodian or trustee may need to manage the property on the child’s behalf. Planning ahead can provide more control over who manages an inheritance. This includes how the money can be used, and when the child ultimately receives control of it.

A financial advisor and estate planning attorney can help you evaluate ways to leave assets to a minor as part of your estate plan.

Every State Has Its Own Laws

As a threshold matter, it’s important to understand that property and estate laws are highly state specific. Every jurisdiction will have its own laws that apply to issues such as property rights, insurance and estate laws. Even the age at which someone is a legal minor changes from state to state.

Most states will use a version of these laws, but each will have its own specific rules. In some cases, a state’s laws may be entirely different from another state’s laws. Make sure to consult with a local attorney before you make any decisions regarding your own money and estate planning.

What Is a Beneficiary?

Several different legal documents can name someone as the beneficiary of any underlying assets. A beneficiary is the third party who receives some benefit from the document, typically in the form of financial or other property assets. While many documents can name a beneficiary, they’re most common in estate law. This is chiefly because beneficiaries are third-party recipients named in some documents. Estate law is entirely concerned with making distributions from the deceased to third parties.

There are four main types of documents that can name a beneficiary when it comes to estate planning:

• Wills. In a last will and testament, a beneficiary is someone who the will names to receive assets from your estate.
• Life Insurance. In a life insurance policy, a beneficiary is someone who receives a payment from the life insurance policy after the death of the policyholder.
• Retirement Accounts. In a retirement account, a beneficiary is someone who receives the assets in the account after the death of the account holder.
• Trusts. In a trust, a beneficiary is someone who receives assets from the account based on the terms of the trust and the trustee’s management.

Can a Minor Be a Beneficiary?

Yes, a minor can generally be named as a beneficiary of a will, life insurance policy, retirement account or trust. However, naming a child as a beneficiary does not necessarily mean that the child can directly receive or control the assets while they are still a minor. How the property is handled can depend on the type of asset, the beneficiary designation and applicable state law.

A minor is generally someone who has not reached the age of majority under applicable state law. Minors have limited legal capacity to enter contracts and manage certain financial transactions. As such, an adult or legal arrangement may be needed to manage inherited property on their behalf.

For example, property left to a minor may be managed by a court-appointed guardian or custodian, depending on the circumstances and state law. Another option is a custodial arrangement under a state’s version of the Uniform Transfers to Minors Act (UTMA). This allows property to be held and managed by an adult custodian for the minor’s benefit. When the beneficiary receives control of UTMA property depends on applicable state law and the terms under which the custodianship was created.

The Role of Trusts

A trust can provide another way to leave property for a minor. Instead of giving the child direct control of the assets, the trustee manages the trust property and makes distributions according to the terms established by the person who created the trust. For example, the trust could permit money to be used for the beneficiary’s education, healthcare, housing or other needs.

Trusts can also provide more control over when a beneficiary ultimately receives the remaining assets. Depending on the trust terms, distributions do not necessarily have to occur as soon as the beneficiary reaches the age of majority. This can make a trust useful when someone wants assets to continue to be managed for a beneficiary beyond childhood.

Special rules can apply to certain assets, particularly inherited retirement accounts. For federal required minimum distribution (RMD) purposes, for example, a minor child of the deceased retirement account owner can qualify as an eligible designated beneficiary. Different distribution requirements may apply while the child is a minor and after the child reaches age 21. Therefore, beneficiary rules should be evaluated based on both the type of asset being inherited and applicable federal and state law.

What Happens If a Minor Is a Beneficiary?

A minor can generally be named as a beneficiary of a will, life insurance policy, retirement account or other asset. However, if the beneficiary is still a minor when the assets become payable, the child generally cannot take direct control of the property. How the assets are handled instead depends on the type and value of the property, the beneficiary designation, any estate planning arrangements already in place and applicable state law.

If no arrangement has been established in advance, a court may need to become involved in determining who can manage inherited property for the child.

Managing Assets for Minors

Common ways assets can be managed for a minor include:

1. Guardian or conservator. A court may appoint an adult to manage inherited property on behalf of a minor. The terminology and rules vary by state. Not to mention, the person responsible for the child’s personal care isn’t necessarily the same person who will be authorized to manage a substantial inheritance. Court supervision and reporting requirements may also apply.
2. Custodial account. Property can potentially be transferred to an adult custodian under a state’s version of the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA). The custodian manages the assets for the child’s benefit until the custodianship terminates under applicable state law. At that point, the beneficiary generally receives control of the remaining property. The applicable termination age can vary by state and by how the custodial property was established.
3. Trust. A trust can hold and manage assets for a minor beneficiary according to instructions established in the trust document. A trustee manages the property and can make permitted distributions for the child’s benefit. Unlike many custodial arrangements, a trust can potentially continue after the beneficiary reaches adulthood. This allows the person creating the trust to specify when and under what circumstances assets will be distributed.

The appropriate arrangement can depend partly on the amount and type of property involved. For example, leaving a relatively small amount to a child through a custodial arrangement may be simpler than establishing a trust. A trust, however, can provide greater control over a larger inheritance or assets that someone does not want distributed outright as soon as the beneficiary reaches adulthood.

Minor Beneficiaries of IRAs and Retirement Accounts

Special federal tax rules apply when a minor inherits an IRA or certain other retirement accounts. Under the SECURE Act rules, a minor child of the deceased account owner can qualify as an eligible designated beneficiary. This distinction is important because the exception applies specifically to the account owner’s child who is a minor, rather than to every beneficiary who happens to be underage.

An eligible designated beneficiary may generally take required distributions based on life expectancy while the minor-child exception applies. This means a minor beneficiary does not necessarily have to leave all of the money untouched until adulthood. The rules governing the amount and timing of RMDs can also depend on factors including whether the original account owner died before or after their required beginning date.

For these federal RMD rules, a child generally reaches the applicable age of majority at age 21. Once a child who qualified for the minor-child exception reaches age 21, the remaining inherited account generally becomes subject to the 10-year rule. The remaining balance generally must be distributed by December 31 of the year containing the 10th anniversary of the beneficiary reaching age 21.

How the 10-Year Rule Works, an Example

For example, suppose a 15-year-old child inherits an IRA from a parent and qualifies as an eligible designated beneficiary. The child may generally take distributions under the applicable life-expectancy rules while the minor-child exception applies. When the beneficiary reaches age 21, the 10-year period generally begins, requiring the remaining inherited IRA balance to be distributed by the applicable deadline.

These rules govern the federal tax treatment and required distributions from the inherited retirement account. They are separate from state-law questions about who has legal authority to manage an account or inherited assets on behalf of a child. Retirement plan terms can also affect the options available to beneficiaries. As such, the specific account and beneficiary designation should be reviewed when determining how the inheritance will be handled.

Naming Minor Beneficiaries With Trusts

A trust can provide a way to manage an inheritance for a minor without giving the child direct control of the assets. This may be particularly useful when leaving a substantial inheritance or when you want to control how assets are managed and distributed after the beneficiary reaches adulthood. However, a trust isn’t the only option. Custodial arrangements and other estate planning strategies may also be appropriate. However, this depends on the assets involved, the amount being transferred and applicable state law.

A trust for a minor can generally be established during your lifetime or through your will. A trust created under the terms of a will is known as a testamentary trust and generally comes into existence after the person who created the will dies. Alternatively, someone can establish a trust during their lifetime and arrange for certain assets to pass to it at death.

The Role of the Trustee

The trust document identifies a trustee who is responsible for managing the trust property according to its terms. The trustee could be an individual, such as a family member or other trusted person, or a professional or corporate trustee. Depending on the arrangement, a trustee may be entitled to compensation and the trust may have other administrative expenses.

The person creating the trust can also establish rules governing how assets are used for the minor. For example, the trustee could be authorized to make distributions for education, healthcare, housing and other expenses. The trust terms can also determine when the beneficiary receives control of the remaining property. Rather than requiring the entire inheritance to be distributed as soon as the child becomes a legal adult, a trust could potentially retain and manage assets for a longer period.

Depending on how the estate plan is structured, a trust may be named as the beneficiary of assets such as a life insurance policy or certain financial accounts. Assets passing through a will may also be directed into a testamentary trust. When the applicable assets become payable or are transferred to the trust, the trustee manages them for the minor beneficiary according to the trust’s terms.

Using a trust can provide greater control over an inheritance, but it can also involve legal, administrative and tax considerations. The appropriate structure can depend on the beneficiary’s needs, the types and value of assets involved and state and federal law.

Bottom Line

Minors can generally be named as beneficiaries, but they typically cannot directly control inherited assets while they are underage. Depending on the type of property and applicable state law, a guardian, custodian or trustee may need to manage the assets until the child is legally permitted to take control. A trust can provide additional control over how and when inherited assets are distributed, while custodial arrangements may offer a simpler alternative in some situations. However, the rules vary by asset type and state. This is why reviewing beneficiary designations alongside the rest of your estate plan can help determine how property would actually reach a minor beneficiary.

Trust Planning Tips

• You don’t have to figure this out on your own. A professional financial advisor can help you analyze your situation and make the right moves for your estate. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area. You can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• The best way to prepare a trust in advance is with a living trust. Let’s review how you can set up a living trust and why you might want to do so.

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