When planning your estate, one of the key considerations is how to leave assets to minors. In California, as in other states, there are legal and financial complexities that need to be addressed to ensure that your minor beneficiaries receive their inheritance in a manner that protects both their best interests and your wishes.

Minors, generally defined as individuals under the age of 18 in California, cannot directly inherit or manage assets on their own. Therefore, careful planning is needed to ensure that any assets you wish to leave for a minor are handled appropriately. In this blog post, we’ll explore the various options for leaving assets to minors in California, including custodial accounts, trusts, and guardianships.

1. Custodial Accounts (UGMA/UTMA)

One of the simplest ways to leave assets to a minor is through a custodial account. California allows for the use of the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA), which provide a mechanism for transferring assets to minors without the need for a formal trust.

What is a Custodial Account?

A custodial account is an account that holds assets for the benefit of a minor. An adult (usually a parent or guardian) acts as the custodian of the account until the minor reaches the age of majority, which is 18 in California for UTMA accounts and 21 for UGMA accounts. The custodian manages the account, makes investment decisions, and ensures that the minor’s best interests are protected.

How to Set Up a Custodial Account

• UGMA Accounts: These accounts typically hold financial assets like stocks, bonds, or mutual funds.
• UTMA Accounts: Similar to UGMA accounts, but they can hold a broader range of assets, including real estate, patents, and other property.

When you leave assets to a minor through a custodial account, the assets are irrevocably transferred to the minor, and once they reach the designated age, the minor gains full control over the account. You can designate a custodial account in your will or through a transfer on death arrangement (TOD) on certain assets.

Advantages:

• Simple to set up and administer.
• No need for a formal trust.
• The custodian retains control over the assets until the minor reaches the age of majority.

Disadvantages:

• The minor gains control of the assets once they reach the age of majority (18 or 21, depending on the account type).
• Limited to certain types of assets (stocks, bonds, mutual funds, real estate for UTMA).

2. Establishing a Trust

A more flexible and robust option for leaving assets to minors is to create a trust. A trust allows you to set specific terms about how and when the minor will receive the assets, offering greater control and protection than a custodial account.

What is a Trust?

A trust is a legal arrangement in which a trustee holds and manages assets for the benefit of the beneficiary (in this case, a minor). The trustee is a person or institution you designate, and they are legally obligated to manage the assets according to the terms of the trust. A trust allows for more complex conditions, such as distributions at certain ages or for specific purposes (e.g., for education, health care, or other needs).

How to Set Up a Trust

To set up a trust, you will need to create a written trust agreement that designates:

• The trustee (the person or entity responsible for managing the assets).
• The beneficiary (the minor who will eventually benefit from the assets).
• Terms of distribution (when and how the minor will receive the assets).
• Conditions (e.g., whether assets will be distributed for specific purposes, such as education, or when the minor reaches a certain age).

California law allows for various types of trusts, including:

• Revocable Living Trusts: A trust that you can change or revoke during your lifetime.
• Irrevocable Trusts: A trust that cannot be changed once created.
• Testamentary Trusts: A trust that is established through your will and takes effect upon your death.
• Special Needs Trusts: A trust designed to provide for a minor with special needs without jeopardizing their eligibility for public assistance.

Advantages:

• Complete control over the timing and terms of distributions.
• You can specify that the minor only receives assets when they reach a certain age or achieve specific milestones (e.g., finishing college).
• A trust can protect assets from creditors, divorce, or other legal claims.

Disadvantages:

• Trusts can be more expensive and complex to establish than custodial accounts.
• Requires ongoing management by the trustee.

3. California Guardianship

If you are concerned about how your minor child or loved one will be cared for in the event of your death or incapacity, you can also establish a guardianship. This is a legal arrangement where a court appoints a guardian to manage both the minor’s personal care and financial affairs.

What is a Guardianship?

A guardianship in California is a legal relationship in which a guardian is appointed by the court to take care of the minor and manage their assets. There are two types of guardianships:

• Guardianship of the Person: This involves the appointment of a guardian to care for the child physically and emotionally.
• Guardianship of the Estate: This involves the appointment of a guardian to manage the minor’s financial affairs.

How to Establish a Guardianship

To establish a guardianship, you would need to file a petition with the probate court. The court will then appoint a guardian who will manage the minor’s finances until they reach the age of majority (18 years old).

Guardianships can be complicated, as they require court supervision and approval of significant decisions, such as expenditures or investments. However, they provide an added layer of legal protection for minors and their assets.

Advantages:

• Offers protection and oversight for both the minor’s care and financial assets.
• Can be ideal for parents who are concerned about who will care for their minor children after their passing.

Disadvantages:

• Requires ongoing court supervision.
• Can be time-consuming and costly to establish and maintain.

4. Transfer on Death (TOD) Designations

For certain types of assets, such as bank accounts, securities, or vehicles, you may designate a Transfer on Death (TOD) beneficiary. This allows you to designate a minor as the beneficiary of the account or asset after your death without the need for a formal trust or custodial account.

However, the designated TOD beneficiary will still need a custodian or trustee to manage the assets until they reach the age of majority. In California, TOD designations can be set up easily through financial institutions or with the help of an attorney.

5. Choosing the Right Option for Your Family

Each of the methods outlined above has its own set of advantages and disadvantages. The right choice for you depends on factors such as:

• The size and complexity of your estate.
• How much control you want over when and how the minor receives the assets.
• Whether you want to provide for the minor’s long-term needs (such as education or health care).
• Your desire for oversight by the court or a third party.

It’s important to consult with an estate planning attorney in California to help determine which option is best suited for your unique situation and ensure that your assets are distributed in accordance with your wishes.

Conclusion

Leaving assets to minors in California requires careful consideration of how the assets will be managed until the minor reaches adulthood. Whether through a custodial account, a trust, or a guardianship, there are various tools available to ensure that your minor beneficiaries are taken care of in the manner you envision. Consulting with an experienced estate planning attorney is key to creating a plan that provides for the financial well-being of your loved ones while complying with California’s legal requirements.

With the right planning, you can provide peace of mind knowing that your minor beneficiaries will be well cared for and that your assets will be distributed according to your wishes.