In Colorado, the age of majority is 18 years old for estate planning purposes. It is at this age that children may become the legal beneficiary of and receive property through an inheritance. What happens if you pass away while your children are minors? Individuals frequently name their children as secondary or contingent beneficiaries on their life insurance policies, retirement accounts, and investment or savings accounts. Who will manage these funds for the child, and where will they be held until the child attains the age of majority?
Without proper planning, the person managing a child’s inheritance would be a court appointed conservator (a conservator is a person who handles financial affairs, whereas a guardian is a person who handles personal affairs). The conservator, who may be nominated in a last will and testament, is responsible for managing the child’s inheritance until the child attains the age of majority. However, the conservatorship does not end when the child reaches the age of 18 years. Conservatorships for minor children typically do not terminate until the minor child has reached the age of 21 years!
How do you avoid the time, expense, and annual court filings required in a conservatorship? Simple – with estate planning. Planning for your minor child’s inheritance can be done in a variety of methods depending on your particular family dynamic, assets, and goals. Here are a few common techniques:
1. Revocable Living Trust: A revocable living trust holds all of an individual’s property during life, and may be designed to retain a child’s inheritance until the child reaches a specified age, life milestone, or may even be held in trust for the child’s lifetime. At a minimum, the property will be managed by the named trustee until the child reaches the age of 18 years, but can also direct how the trustee may distribute funds for the child’s health, education, maintenance, and support as well as direct specific amounts or percentages of a child’s share to be distributed at stated intervals.
2. Testamentary Trust: A testamentary trust is designed and created in your last will and testament. This type of trust is created through the probate process and the trustee named in your last will and testament would receive the trust assets to be managed from the personal representative of the estate. This trust can distribute property in the same manner as a revocable living trust in a share created for a child and can be tailored to meet your specific goals.
3. Custodial Account: An alternative to trust planning is to include distributions for a minor child to a custodial account, such as an UTMA account. However, these accounts must be paid out to the child by a state mandated age. In Colorado, an UTMA account must be distributed to the child by the age of 21 years.
When considering your options, it’s important to think about whether you want your children to inherit a lump sum of money at the age of majority. This can be quite a responsibility for a young person! If your intention is for them to save the money for college, for the down payment on a first home, or even as a nest egg for emergencies or retirement, your estate planning is of particular importance because there is no guarantee the inheritance will be properly managed and invested once distributed. Once the children receive a lump sum, it is theirs to spend as they please!