Mo’ Money? No Problem!

In a previous blog, I discussed the importance of naming a guardian for your minor children. If you have yet to do so, I would strongly encourage you to set up a guardianship ASAP. I cannot stress enough how important it is to ensure your children are protected and safe, if for some reason you and/or your partner become unable to care for them. Similarly, if you plan on leaving money to your minor children, you will also need to appoint someone to help them manage the money. This person is referred to as a guardian of the estate or property guardian. This person’s job is to make good investment decisions and spend that money solely for the child's benefit. In this month’s blog, I will discuss the process of how to leave money to children, some of the rules regarding how to leave money to children and what steps you can take to begin this process. 

First of all, in California, if you leave more than $5000 of property to a child under the age of 18, you will need to also appoint a property guardian to manage the money. Even if a child is 18 or a few years older, you may still want to appoint a property guardian to help your child manage this money for several more years by someone who is more experienced with these things. Intuitively, this makes a lot of sense. Think about how much you knew, or rather didn’t know, about money when you were a teenager. Would you have been ready to make sound business investments to help your money grow? Would you feel confident in being responsible enough to manage a significant amount of money i.e. more money than you’ve ever had before? The answer for most of us is definitely not. And most parents feel the same way about their young kids. That’s why we have safeguards and protections in place. To save us from our young, fiery selves. A property guardian is someone who you trust to be responsible with investments and make sound financial judgements. This person doesn't have to be a Wall Street guru, just someone who you know has some knowledge of what a sound investment is and has the best interests of your child at heart. 

Regardless of how much money you’re leaving your children, you can always set an age limit on when the child receives that money. As a general rule of thumb, I advise my clients that the more money they leave their children, the older you’re likely to want them to be before they can access it. For example, you may have no issue with a 21-year-old inheriting $50,000 outright. They will be able to use this money for college tuition and other expenses and would have a nice cushion to get started in life after they graduate. However, when that number jumps up to $500,000 or even $1 million, you're likely to feel differently about when your child is ready to handle that amount of cash. This situation often comes up with life insurance policies and retirement accounts, as those policies tend to grow exponentially over the years, but that is a topic for another day. For today, let’s focus on what vehicles are available to manage money for children. 

There are two main structures to be used to manage the money: a custodial account and a trust. (Please note: for children with special needs, a special needs trust is appropriate. That is outside the scope of this blog, but if you have a child with special needs please consult an estate planning attorney). A custodial account is usually a bank or brokerage account opened up in the name of the minor child. You will select someone to manage the account for the child until the child turns 25 years old, which is the legal age limit. With a trust, you select someone to manage the money and other property, i.e. the trustee, for whatever purposes you specify in the trust. You can create individual trusts for each of your minor children or create one large trust for all of them which is called a “pot trust.” This type of trust can be set up along with your own will or living trust. Both of these methods provide a way to manage children's property until they’re adults, and each of them allow the property guardian to take reasonable compensation for managing the money. However, there are differences in key asp[ects, including, how long the money lasts and how much flexibility they offer. I’ll provide a brief overview of these differences below. 

When deciding on whether to set up a custodial account or a trust, try to think of it as analogous to shopping for a new tablet or laptop. The most expensive model has all the bells and whistles available on the market, but that might not be the best product for your familial and/or financial situation. This is why it is crucial to have a clear understanding of the value of your estate, so you know which product best suits your situation.  A custodian account is the simplest account to set up. The executor of your will will be responsible for opening this account after your death. This account is easy to set up and is a great idea if you don’t mind your child inheriting the money at a relatively young age, i.e. 18-25. In order to start this process, you will want to include language in your will or trust that states any money a child inherits from you should go into a custodial account and then name a custodian for the account. Keep in mind you must establish a separate account for each child. California doesn’t allow you to pool all of the assets into one account for the benefit of all your children. This may cause some problems if you have a child who requires more assistance than others, as the custodian will not be able to dip into a brother or sister’s accounts to help pay the bills of another child. This lack of flexibility, can be a deterrent to opening a custodial account and in that situation a trust makes much more sense. Also, according to the California Uniform Transfers to Minors Act, or CUTMA, the custodianship ends when the child reaches age 25. You also, cannot designate the funds be used for certain purposes, like you can in a trust. This means that the child will inherit all of the money in the account at age 25, with no strings attached. However, the benefits of a custodian account are that they are easy to set up with low or no cost, you only need one type of account and all financial institutions are readily familiar with these types of accounts which makes opening the account super easy. 

A trust on the other hand is more complex. A trust allows you more control and flexibility in how the money should be used. For example, if you want the money to be used solely for college expenses or to place a down payment on a house, you can state those terms clearly in the trust. You can also restrict use of the money by stating you don’t want this money used for a specific purpose, like buying a fancy sports car or a lavish vacation. In short, a trust is the way to go if you want to leave a significant amount of money to your children, you have someone you know can manage the money until the children are older than 25, and you want to retain your control and flexibility. You can set up individual trusts or make one pot trust for all of your children. This trust can be set up at the same time you set up your own estate plan and will work very similar to a normal revocable living trust (see previous blog post on the differences between a will and a trust for more information). Just like your own living trust, you will name a trustee to manage your children’s money, as well and the trustee has  fiduciary duty to manage the assets for the benefit of your children. The trustee is also entitled to a reasonable fee for the management and care of the assets, as would a property guardian, as well. 

So, overall, you have some options when it comes to leaving money to children. Both options have their benefits and whichever one is right for you depends on your familial and financial situation and also on how you prefer the money be used by your children. Remember, there’s no substitute for a well-prepared estate plan. Sign up for your initial consultation today and let’s get started on securing your future! Stay safe and healthy out there!