Critical Factors to Consider When Leaving an Inheritance to Children or Grandchildren

Although plenty of people understand the importance of leaving an inheritance to their children or grandchildren, few have procedures in place to ensure proper money management. The benefit of planning is that it helps you maximize the assets your loved ones receive when you can't provide for them.

Below are several financial factors you must consider when leaving an economic legacy.

First, all assets left to a minor must be held by a guardian or placed in a trust because minors can't legally hold and manage inherited money. While directing that your money will be held by your child's guardian seems intuitive, it can actually cause many problems. Assets held by guardians are subject to strict and burdensome court supervision. As a result, expensive legal fees and time-consuming court procedures can make it difficult for the guardian access the money and use it for the benefit of your child or grandchild when they need it.

What about your life insurance or retirement accounts? Unfortunately, directly naming a minor as beneficiary of these assets is risky. The insurance company or brokerage house could hold the assets until the child turns 18 and then turn it over to the child directly. Many companies won't even release funds to a surviving parent for safekeeping and management without a time-consuming and expensive court decree.

One alternative is an UTMA (Uniform Transfers to Minors Act) account. Controlled by state law, these accounts hold money given to minors. The account is legally owned by the minor (it even includes his/her Social Security number) but the management and access is controlled by the custodian you choose until the child turns 21 - or other age specified by state law.

The UTMA account is a great vehicle, but it raises an important question: Do you believe in your child or grandchild's ability to manage a large sum of cash at 21? Will that money go to college tuition or a Ferrari and a month in Las Vegas?

If you prefer having your funds held until your child or grandchild is well into adulthood, then an "inheritance trust" is a smart option. A trust allows you to control the use and distribution of your assets after you're gone. You choose a trustee (who can be a friend, family member, advisor or financial institution) who will oversee the funds and use them for your child or grandchild's health, education and support. Assets held in the trust are protected from poor spending habits, lawsuits, creditors and divorce. The trust funds will be turned over to your child or grandchild directly at the age your designate, which could be 25 or 30, or even later.

You may even decide to have the assets remain in the trust for many decades and allow the trustee to use those funds to benefit your grandchildren, great-grandchildren and further descendants. This type of arrangement, often called a "dynasty trust," provides the highest possible level of asset management, lawsuit and creditor protection, and tax minimization, and is exactly the type of planning done by America's wealthiest families.

Of course, you can navigate the tricky and often obscure laws of asset protection with competent legal advice. You'll get a clear understanding of your choices, so you don't risk creating financial struggles, unnecessary taxes and strained family relations.

Joseph P. Donlon is a New York estate planning attorney and the founder of Donlon & Associates, PC. He is a frequent lecturer on estate planning topics and is routinely invited to speak before financial institutions, civic groups and business gatherings. Get more of his free tips and insider information about how to protect your family, reduce estate taxes and safeguard your assets at

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