Protecting a Minor’s Inheritance

            Leaving an inheritance outright to a
minor raises various concerns.  Let us
consider some important concerns and possible solutions.

            A frequent concern is that anything
left to a minor may be taken away and used by a self-serving parent.  For example, consider a couple who names
their now single daughter’s children as alternative death beneficiaries should
the daughter not be alive to inherit.
The daughter’s parents are concerned that their ex-son in law, whom they
distrust with good reason, will do his best to get control over any inheritances
that pass to his children (from the grandparents).  How can this be prevented?

            The best way to prevent this is to
provide that the grandchildren’s inheritances will be held in further trust, or
else, if the amount is relatively modest, be held at a bank in a custodial
account (CUTMA), under the control of a trustworthy relative, friend, or
private fiduciary as trustee or custodian, as relevant.   In the example, this would protect the
inheritance against the grandchildren’s predatory father.

            Another concern is that anything
left to a minor will be wasted or abused by the minor as soon as he or she get
their hands on it.  Leaving the assets in
trust with express goals and uses allows the trust to purposefully further worthwhile
goals.  For example, the trust may allow the
trustee to pay for the child’s college tuition, room and board and perhaps a stipend
so long as the beneficiary maintains at least a “B” average and carries a full
course load.  The trust encourages the
beneficiary to pursue college but prevents him or her from becoming lazy and
uninterested in his or her own responsibilities.

            Further concerns are “when”, “how” and
even “if” the minor receive outright inheritance distributions.  Should inheritances be distributed in stages
or all at once upon attaining a certain age?
At what age should distributions occur?
There is no single answer.  Some
trusts distribute everything once the beneficiary attains a certain age (say, 21
or 25), others distribute in stages (e.g., a third at age 21, half at age 25,
and the rest at age 30), and still other trusts hold everything in trust for
the beneficiary’s lifetime.

            Trusts that hold assets up to the
beneficiary’s entire lifetime are usually discretionary trusts created to
protect the assets from creditors.  Discretionary
trusts give the trustee absolute discretion over if, when and how assets should
be used for the beneficiary’s benefit. 

Special Needs Trusts, for example, are completely
discretionary trusts.  The trustee may,
but does not have to, use the assets to pay for the comforts of life that are
not provided for by welfare benefits (SSI and Medi-Cal) while preserving
eligibility for such needs based benefits.

Other discretionary trusts serve simply to protect the assets
against the beneficiary’s own creditors.
If the beneficiary cannot demand distribution of the assets then neither
can his or her own creditors (limited special exceptions, including one for the
unpaid child support owed by the beneficiary).
Such discretionary trusts allow the trustee to make purchases and
payments on behalf of the beneficiary without directly depositing money into
the beneficiary’s own account, where creditors can get at it.

Lastly, what if minors depend on their parent’s or guardian’s
estate being kept intact – instead of sold and divided – how can they be
protected when their parent dies?  A
so-called “family pot trust” allows the trustee to keep the parents’ estate
undivided in order to provide any dependent children with a home.  Once the last dependent has reached a
milestone (usually age 21 or 25) then the trust assets are sold, and typically
divided equally amongst the adult children.