Planning for Minor Beneficiaries – Comparing Two Basic Options

December 30th, 2021 - Colin R. Morrow

Whether putting together your will for the first time or reviewing your existing estate planning documents, it’s important to keep this estate planning concept in mind: minors can’t receive property outright like an adult can. Someone must hold a minor’s inheritance for them at least until they reach the age of 18. If you have minors who could potentially receive property under your will (for example, young children or grandchildren), it’s important to plan for how this property will be held for them in the event they are still minors when you pass away. Lack of planning can burden your personal representative (the person in charge of carrying out your will) by leaving them bereft of guidance and potentially needing to seek direction and authorization from the court (an otherwise unnecessary complication and expense). By contrast, planning for the possibility of having minor beneficiaries empowers your personal representative, giving them a clear plan to follow and the necessary authority to carry it out.

So what does this planning actually look like? There are two basic options: the “custodial provision” versus the “minor trust.”

The Custodial Provision

By “custodial provision” I mean a provision in your will that creates a custodianship for any minor beneficiaries who cannot receive property outright. It appoints a trusted person (the “custodian”) to hold any such property on behalf of the minor until the minor reaches a set age. The ability to name a custodian like this is a feature of the Washington Uniform Transfers to Minors Act (“UTMA”) and the UTMA supplies the rules for how this property should be managed and eventually distributed. I consider this the simple option because the state legislature has essentially drafted a default trust to be used when property needs to be held for a minor beneficiary. There’s no need for you to come up with the operative trust terms (these are supplied by the provisions of the UTMA); all you have to do is specify that you want to use the UTMA and specify who should be custodian. The tradeoff for this simplicity is that you don’t have much control over how the property is held beyond naming the custodian and deciding when the minor beneficiary should receive the property outright (under the UTMA, property is usually payable to the minor beneficiary at 18 and the latest age until which you can delay distribution is 25). Property held in a custodianship is, in most cases, left in a secure account to await the minor beneficiary’s coming of age.

The Minor Trust

By “minor trust” I refer to inserting a trust into your will the purpose of which is to hold property on behalf of a minor beneficiary until they are eligible to receive it outright. The minor trust is similar to the custodianship in the sense that you are once again designating a trustworthy person (now called a “trustee” as opposed to “custodian”) to hold property on behalf of a minor beneficiary. But unlike the custodianship, the terms by which that property is held and used are completely up to you. Perhaps you want to keep the property in trust to pay for a child’s college tuition and then condition full distribution on graduating college. Or perhaps you want to stagger distribution of the property over a child’s lifetime (a portion at 18, more at 25, a little more at 30, the rest at 35 etc.). Maybe you have a special needs grandchild who will likely never be able to receive property outright and you want that grandchild’s inheritance to be held in trust indefinitely and used to support and enhance his or her quality of life. I consider the minor trust to be the complex option because the rules for how property is held, used and distributed can be extensively customized to suit your wishes, your values, the specific needs of a particular beneficiary etc. Unlike a custodianship, property held in trust is often actively managed by the trustee according to the specific trust terms and the evolving circumstances of the minor beneficiary.

In Conclusion

Planning for the possibility of minor beneficiaries is a key part of estate planning. Of the two basic approaches, the custodial provision should be thought of as the simple but low-control option. It’s quick and easy to insert into your will, it’s relatively straightforward for your personal representative to get the custodianship in place, being a custodian doesn’t usually require much of a time investment, but ultimately your control over how the property is held, managed and distributed is very limited. By contrast, the minor trust approach is best thought of as the complex but high-control option. Drafting and fine-tuning the trust terms can mean much more back and forth between you and your estate planning attorney, and depending on those terms the actual job of being trustee can be more time consuming and complicated than being a custodian, but taking the time to create a minor trust offers you the ability to exercise a high degree of control over the property you leave to a minor beneficiary.

Disclaimer: This article and blog are intended to inform the reader of general legal principles applicable to the subject area. They are not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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