Inheritance For Minors

I have a client whose 2 sons (ages 2 and 4) are set to inherit around $4M each in two years.  The parents only concern is what is best for the kids long term.  They just met with and estate planning attorney who is encouraging them to put the money into a custodial account where a judge will oversee all transactions. The attorney says this is the only way the kids will not have full access to the money at the age of majority (a major concern to my clients). I agree that turning over this kind of money to a 21 year old is a scary proposition, but involving lawyers and the court to oversee these accounts for the next 2 decades sounds expensive and cumbersome. I am wondering if there are any other options they could explore?

Could the parents oversee the account until the kids are at least into their teen years and then get the courts involved to limit the kids access? Are their any trust configurations that would limit the kids access after the age of majority?

On the investment side, I am thinking they should open a 529 plan for each and use the 5 year contribution election to fund their 529 plans. (To allow for that portion of the money to grow tax-free when used for college.) What other strategies are there that could help the money grow tax efficiently and/or keep the money from being spent recklessly?

Thank you very much in advance!



You obviously have two different issues here. 
First, having dealt with trusts for minors who inherit substantial money, to the best of my knowledge, turning it over to a court is not in the children's best interest unless there are no responsible parties available to be trustees. The court, in my experience, will require CDs or Treasuries for the money to preserve the nominal principal but will by quite happy to see inflation and fees gradually diminish the purchasing power of the inheritance. And... again to the best of my knowledge, they are still going to be the recipients of the money at age 18 or 21 depending on the provisions in the will and state law. The plus in that route is that it limits the ability of the now minor children to sue for damages when they reach majority.

In my humble opinion, presuming you are a true fiduciary, fee-only investment adviser, and can apply the standards of the Uniform Prudent Investor's Act of your state, as well as ERISA standards to the portfolio, setting up the portfolio under MPT with clear best-interest standards and the parents as trustees is probably the optimal situation. 

I suggest you find a board-certified estate attorney to work with on this who will represent the children and is willing to work with you, again presuming that you are a truly independent fiduciary with an appropriate fiduciary bond and able to work under ERISA and UPIA standards. 

If you have any contamination with conflicts of interest or work for a broker-dealer by employment or contract, you are on thin ice and could easily find yourself in deep, deep trouble for some simple mistake. 

Regarding the 529 Plan. I am curious who could be the donor? To the best of my knowledge, a minor cannot create a 529 plan for themselves. The 529 is considered to be an asset of the parent or other trustee/donor. The children would have to gift the money to their parents who could then open a plan, but having children/beneficiaries gifting money to their parents is pretty much a violation of fiduciary duty. 

Beyond that, the trust, whether a UTMA or more formal trust, will have income each year that must be claimed by and taxed under the children's SSAN. I recommend a separate account be set up for that income to the degree it exceeds the cost of reasonable care and standard of living. Here is where a formal trust is in order. Providing specific language in the trust that will control the disposition of that income received from the inheritance before the age of maturity is, in my opinion, critical. Here is where a board-certified estate attorney will be critical. 

If you are on top of your game and a professional fiduciary, you can work with your clients and the attorney to develop a clear and responsible plan that will guide and protect all concerned. Once again, if you have conflicts of interest, you are treading on dangerous ground though.

10-30-2017 10:00

​Since there appears to be no restrictions on the inheritance I cannot see how the attorney plans to control past the age of majority.  529 contributions make some sense although I would be tempted to suggest limiting it to enough for one private college education bill split into two accounts.  Nothing wrong with setting up regular parent custodian accounts for some of the funds, perhaps half the balance after 529 contributions.  Perhaps the rest could be invested in some type of deferred annuity for each that could be activated if the parents thought it necessary before 21.  Also, they could each buy $10,000 of I-bonds each year.