When minor children are addressed in an estate plan, special considerations are involved to ensure their well-being and financial security. Parents ought to make decisions about who they would prefer to serve as the guardian for their minor child, how assets should be managed for the benefit of the child, and gifting strategies both during the parents’ lifetime and after their passing. Other family members may wish to make gifts to children as part of a strategy to shift assets for estate tax purposes.

Appointing a Guardian

One of the crucial decisions parents must make is choosing a guardian for minor children in the event of their parents’ untimely death or incapacity. This person would be responsible for the children’s upbringing, which may include decisions related to education, health care, and overall well-being. Parents should assess the guardian’s values, financial stability, and willingness to serve. It is also advisable to identify an alternate guardian in case the primary choice is unable or unwilling to act.

Options for Making Lifetime Gifts to Minor Children

Parents and grandparents often wish to provide financial support to minor children during their lifetime or at their death. One has several options to transfer assets to minors:

• 529 Plan: This is an investment account that grows tax-free and may be used to pay for a beneficiary’s qualifying educational expenses (most often college, but it can cover K-12 as well). A 529 plan offers tax advantages, but there might be contribution limits and rules that govern how the money must be used.
• Custodial Accounts (UGMA/UTMA): These allow gifts to be held in a minor’s name and managed by a custodian until the child reaches a certain age. The age when the account terminates is determined by state law or by the estate planning documents that direct the creation of the account. Custodial accounts may be set up with most financial institutions. When the minor reaches a certain age, he or she is entitled to full control. To open a custodial account, the custodian will set up the account at the financial institution on behalf of the beneficiary. A person should not be custodian if the individual does not want the value of the account to be pulled back into the custodian’s estate for estate tax purposes. This means that if you are the custodian and die before the minor, the funds in the account will be included in your estate and potentially subject to estate taxes. The income will be reported by the minor for tax purposes. The asset will be counted in financial aid calculations, and, as property of the minor, is not protected from the minor’s creditors.
• Irrevocable Trusts: Individuals may establish an irrevocable trust to hold assets for a child’s benefit while dictating terms for distribution and ensuring controlled access to the funds. Trusts can be more involved than other gifting methods and impose annual reporting requirements and tax filings. Trusts can be advantageous for the beneficiary since they offer some creditor protection and may keep the gifted assets out of the child’s estate for estate tax purposes (and thereby avoid future taxation). If you’re establishing a trust, selection of a responsible trustee is crucial. This person will manage assets, make distributions, and presumably act in the child’s best interest.
• Special Needs Planning: If a child has special needs, a special needs trust can protect government benefits for the child, as well as provide further financial support for needs not covered by government benefits.

If you choose to make gifts to a minor during your lifetime, you should be aware of potential gift tax implications.

Paying a provider directly for a minor’s qualifying education or medical expenses is a way to make gifts that entail no gift tax consequences. Such payments are not treated as gifts, and that means qualifying payments will not reduce your lifetime estate and gift tax exemption or apply toward an annual gift exclusion. However, certain payments—those for room and board, for instance—are not “qualifying” and could affect a child’s financial aid award.

Conclusion

Estate planning for minor children requires thoughtful consideration and strategic planning. By selecting guardians, utilizing lifetime gifting strategies, and structuring inheritances wisely, parents can ensure their children are financially secure and well cared for. Consult with an experienced estate planning attorney who can help you tailor a plan that best meets your family’s particular needs and goals.

This article summarizes aspects of the law and does not constitute legal advice. For legal advice with regard to your situation, you should contact an attorney.