Leaving property to young children

Most parents, at one time or another, give serious thought to what would happen to their children in the unhappy -- and very unlikely -- event that one or both parents die prematurely. Apart from the loaded question of who would raise the children (see Choosing a Guardian for Your Children), would they have enough money? And who would manage it for them until they became adults?

Many parents don't leave money directly to their children. Instead, they leave everything to each other, with the understanding that the survivor will care for the children. They name their children as alternate beneficiaries. Many single parents, however, leave property directly to their children.

Either way, you should arrange for someone to manage whatever property they may inherit, in case they receive it while they're still too young to manage it themselves. You can take care of this in your will or living trust

If you don't arrange for property management for young children (under 18), the probate court will do it for you by appointing someone to serve as the children's "property guardian." The court often appoints the other parent -- but not in every case. This arrangement comes with some headaches; usually, a court-appointed guardian must make frequent reports to the court and has limited authority to decide how the property should be managed.

If your children are 18 or older when they inherit from you, they'll have complete control of the property unless you specify otherwise in your will or living trust.

Fortunately, it's easy to avoid the uncertainties and hassles of court-appointed guardianship, or the worry that a 20-something beneficiary may not manage an inheritance wisely. You can choose someone, now, to manage any property that your minor or young adult children may someday inherit from you. There are lots of ways to structure this arrangement. Here are four of the simplest and most useful.

1. Name a Custodian Under the Uniform Transfers to Minors Act

The Uniform Transfers to Minors Act (UTMA) is a law that has been adopted in substantially the same form in almost every state. (The holdouts are South Carolina and Vermont.) Under the UTMA, you may choose someone to manage property you are leaving to a child. This person is called a custodian. If you die when the child is still under the age set by your state's law -- 21, in most states -- the custodian will step in to manage the property. (Older offspring get their property outright.)

To set up a custodianship, all you need to do is name a custodian and the property you're leaving to a young person. You can do this in your will or living trust, or when you name a beneficiary for an insurance policy, if you're leaving life insurance proceeds to your kids. For example, your will might state, "I leave $10,000 to John Doe, as custodian for Jane Smith under the New Jersey Uniform Transfers to Minors Act." That would be enough to create the custodianship if it's ever needed.

In most states, an UTMA custodianship ends when the beneficiary is 21. But a few states end them at 18, and a handful allow you to extend the age to 25. If you don't want the beneficiary to get the property so young, you may want to use a trust (discussed below) instead.

2. Set Up a Trust for Each Child

A second approach is to establish a trust for each child. With this arrangement, you use your will or living trust to name a trustee (usually a trusted relative or friend), who will handle money or property the child inherits until the child reaches the age you specify. If the beneficiary is already over this age at your death, the trust never comes into being; instead, the property goes straight to the beneficiary.

The trustee must act in the beneficiary's best interests and follow your written instructions. Generally, the trustee can spend trust money for the young person's health, education and living expenses. When the child reaches the age you specified, the trustee ends the trust and gives whatever is left of the trust property to the beneficiary.

Serving as a trustee is more work than is serving as a custodian under the UTMA. For one thing, a trustee must file annual income tax returns for the trust. And because the powers of a trustee are limited to what's allowed in the will or trust document, the trustee may have to show the will (or at least the part of it that outlines the trustee's authority) to banks and others with whom he or she deals. The powers of an UTMA custodian, however, are set out by state statute. Most banks and other institutions are familiar with them and know just what authority custodians have.

3. Set Up a "Pot Trust" for Your Children

If you have young children, you may want to set up just one trust for all of them. This arrangement is often called a pot or family trust. In your will or living trust, you authorize the trust and appoint a trustee, who will have the power to dole out trust money to each of the children. The trustee doesn't have to spend the same amount on each child; instead, the trustee decides what each child needs. When the youngest child reaches a certain age, usually 18, the trust ends.

A pot trust provides great flexibility for the trustee. Its major drawback is that the older children can't receive their shares of the trust property until the youngest child turns 18; they may not get control over their inheritance until they are well into adulthood.

4. Name a Property Guardian

If you wish, you can simply use your will to name a property guardian for your child. Then, if at your death your child needs the guardian, the court will appoint the person you chose. The property guardian will manage whatever property the child inherits, from you or others, if there's no mechanism (a trust, for example) to handle it.