Before exploring what happens to assets left to a minor, it makes sense to first define “minor.” Legally, a minor is an individual who, by reason of their age, is considered legally incapacitated and thus prevented from making certain decisions that someone with full legal capacity would be entitled to make for themselves. While sometimes restrictive, the laws are intended to be for the minor’s own good – to protect them from their own bad decisions or from third parties seeking to take advantage of their inexperience. For the same reason we would not allow a child to accrue credit card debt in their name or get a tattoo, we do not allow children to take full control over large sums of inherited money. Depending on the state, the “age of majority,” or the age where an individual ceases to be considered a minor, is between 18 and 21. Some states grant certain rights at 18 while reserving others until later ages. In Wisconsin, the age of majority is 18 for almost all purposes, but age 21 for purposes of UTMA and UGMA accounts.
Anyone 18 years of age or older who is a direct recipient of inherited property will receive it outright and have full control to spend, save, or invest it as they wish. Examples of direct bequests are being named in a will or beneficiary designation, or by the default inheritance rules created by Wisconsin law if the deceased died without a will. If the beneficiary is instead under 18 years old, they will not be entitled to take control over that property until they reach the age of majority. Instead, a guardian is appointed by a court to control that property on their behalf. This person is often the same as the guardian named to look after the minor, but the legal roles are distinct. The “guardian of the estate/property” looks after the money the minor is entitled to, and the “guardian of the person” is empowered to make the decisions relating more directly to the minor’s life, such as educational and healthcare choices. If the deceased had a will and the recipient is their minor child, they hopefully named the individual(s) they wanted to serve in these roles. If not, the court will appoint someone in its discretion. If the minor beneficiary is living with their parents, the parents will almost always be named as guardian unless the court has a good reason not to. If the parents are divorced, typically the parent with primary custody will be given the guardianship. The guardian of the estate has control of the money and can access it to use for the minor’s care until they turn 18. Once the beneficiary ceases to be a minor, they gain full control over the remaining funds – if any are left.
Certain reporting requirements and oversight procedures are in place, but this role is still rife with the opportunity for abuse. While some cases of guardians misusing the minor’s funds are clear, things are often more nuanced – especially if the guardian of the estate and the person are the same. It is important that the guardian appointed be an honest and competent individual who will carefully guard the minor’s assets against neglect, poor investment choices or abuse (from themselves or third-parties). For their own protection, guardians should carefully document their management of the money as lawsuits for mismanagement or misuse are not uncommon when a beneficiary turns 18 and discovers their inheritance has already been spent. In some cases, it may be beneficial to arrange for the guardian of the estate and of the person to be separate people. While this can complicate things and can lead to conflict between the two guardians, the extra level of oversight and separation often results in a more conservative use of the funds, making them more likely to be retained for the minor once they turn 18.
Many consider 18 too young to be given free reign over large amounts of assets. Even middle-class people can pass on substantial sums after life insurance policies are paid out and their material assets, like their home, are sold. Receiving several hundred thousand dollars, let alone millions, can provide benefits that last a lifetime if managed properly. Unfortunately, most inheritances are completely spent within a few years with minimal lasting benefit. Developmental and behavioral scientists largely agree that decision making abilities are not fully matured until at least age 25, a full seven years later than when a minor recipient of a direct bequest will receive and be able to spend an inheritance.
The solution to this problem lies in not making a “direct” bequest. Instead, a trust, created for the benefit of the individual, is named as the beneficiary. Trusts are extremely flexible tools that can be used to meet a variety of estate planning objectives, but among the most common use for them is to delay the time when a beneficiary will receive control over inherited assets. In short, a trust is a legal arrangement, made either during life or as part of a will, which creates a separate legal entity, the trust, to hold assets. The person in charge of managing the trust is the “trustee,” and the trustee manages the assets on behalf of the “beneficiary.”
Because trusts are so flexible, trying to answer: “What happens if a minor inherits money under trust?” can only really be answered with “Whatever the trust says happens.” However, in a typical trust for a young beneficiary, the trust will hold onto the money until a set age reached by the beneficiary, often 25 or 30 or pay out fractions of the trust funds every few years until all funds are paid out. At that age, the beneficiary is given the funds and the trust, now empty, terminates. However, many trusts also contain provisions that if the beneficiary is suffering from drug, alcohol or gambling addictions or if the money is likely to go to a creditor if distributed, the trustee can hold onto the funds until it is safe to distribute them.
During the term of the trust, the trustee is usually instructed to make the money available to take care of the beneficiary’s “health, education, maintenance and support.” Much like a guardianship or custodial account for a minor, these funds will be available to pay for medical bills, room and board, tuition etc. If drafted properly, keeping the money in trust can help keep the inheritance safe from the beneficiary’s own recklessness, as well as from creditors or divorcing spouses, until they are hopefully old and wise enough to avoid these mistakes and manage the money on their own. When large sums of money are at play, some people view the creditor protections offered by trusts as so beneficial that the payout age is either much later in life or write their trusts to exist for the entire length of the beneficiary’s life, with a variety of options for how the remainder is paid out after their death.
The final type of inheritance a minor may receive are funds under UTMA or UGMA designations. The two types of accounts have some differences, mainly relating to investment options and tax implications, but for the broad overview offered here, they can be used interchangeably. Under these Acts, someone writing a will can specify the minor as the beneficiary of the assets to be managed under UTMA and name a custodian to manage the inheritance up until a listed age or age 21 in Wisconsin, whichever is sooner. For example, a will might state “To my nephew John Doe, I leave a specific bequest of $10,000 to his mother, Jane Doe, as custodian for John Doe, under Wisconsin Uniform Transfers to Minors Act to age 21.” While not offering all of the flexibility and options for longer retention periods available using trust funds, using these types of accounts are a simple and cheap way to address the control of funds intended for minor beneficiaries. If assets are left to a minor and the deceased did not name a custodian in the estate plan, in Wisconsin, the person handling the estate (either the executor of the will or the trustee of the trust) can create a UTMA account but it must end at age 18 and if the assets exceed $10,000, then the supervising court must approve it.
When choosing which of these methods are appropriate for your estate planning, there are a number of factors to consider, including: the likelihood of assets passing to a minor, the amount of money involved, and the character and maturity of the potential beneficiary, as well as their parents or guardians who may take control over the money. An estate planning attorney can help you determine the best option for your situation and to correctly implement those choices as part of your estate plan.