In our most recent Wealth Management Insights publication, Samantha Pahlow, CTFA, AWMA, provided a primer on considerations when naming minors beneficiaries of retirement and other financial accounts.
by Samantha Pahlow, CTFA, AWMA
Wealth Management Chair
PLANNING FOR OUR CHILDREN’S FUTURE
Often, the most important legacy goal of parents revolves around supporting and safeguarding their children’s futures, particularly during their formative years. This encompasses a broad spectrum of considerations, from appointing trusted legal guardians to ensuring they can afford an education and inherit valuable assets such as investments, real estate and more.
A crucial aspect to understand when planning a legacy is the distribution of assets, especially to minor children. Legally, minors are prohibited from owning or inheriting assets outright. Instead, they require a representative—such as a trustee or custodian—to manage these assets on their behalf until they reach adulthood. This legal nuance becomes particularly intricate when minors are designated as beneficiaries on retirement accounts like IRAs or employer-sponsored plans.
Without explicit instructions, naming a minor as a beneficiary may necessitate court intervention to appoint a conservator or guardian. This process, often cumbersome and costly, can disrupt the timely and intended transfer of assets.
To avoid such potential complications, many parents choose to name a trust or an individual as a custodian under state law to receive and manage assets for the beneficiary until they are an adult. The age at which this transfer occurs differs by state but is commonly 18 to 21 years old. This method streamlines the transition and mitigates the risk of court intervention, providing a simpler pathway for asset transfer to minors.
For those seeking greater control over the inheritance—be it restricting fund usage or extending management beyond the age of majority—a trust can be an effective solution. By creating a trust and naming it as the beneficiary, with the minor as the trust's beneficiary, parents can dictate the terms of fund disbursement and provide greater and longer protection of those assets.
However, it's important to note the higher costs and complexities associated with trusts. They require the help of an attorney to properly plan for and create it, a trustee to oversee and manage the trust, and they have ongoing administrative needs and expenses. Furthermore, when a trust inherits a retirement account, there are intricate tax rules to contend with to prevent unintended tax consequences. Typically, trusts are employed only when the benefits outweigh the complexities.
Given the nuances involved in naming minor children as beneficiaries of accounts, professional advice is crucial and we recommend you work directly with your attorney and portfolio manager to appropriately structure and document.
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