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What is the Best Way to Leave Money to a Child?

If you plan to leave money or other assets to a minor as part of your estate plan, you need to consider how such a gift will be administered. Minors—that is, anyone under the age of 18—generally cannot manage their own funds. Under California probate law, a court may appoint a guardian for the minor’s estate, which may include a gift left to him or her under someone else’s estate plan. But there are other alternatives to consider.

The California Uniform Transfer to Minors Act

Let us say you want to leave your niece, who is currently six years old, a gift of $10,000 in your will. Assuming you die before she turns 18, your will can specify this gift will be made to her father (your brother) under the California Uniform Transfer to Minors Act (CUTMA). This is a law that basically allows you to make a gift to a minor through an adult “custodian.” So in this scenario, your estate would give the $10,000 gift to your brother, who would serve as custodian of the funds for your niece. The custodian is largely free to invest and manage the money as he sees fit, provided he must turn whatever funds there are to the minor when she reaches the age of 18.

Gifts Made Under a Trust

Alternatively, if you have already created a living trust as part of your estate plan, you can leave your trustee with specific instructions regarding the management of any gifts to minors. Unlike the CUTMA, where the custodian has final say over such funds, a trust is bound by whatever instructions you leave the trustee. This means you could direct the trust to invest funds in a certain manner and pay any income to the minor at specified intervals. You could even extend the length of the trust’s control past the age of 18—for instance, requiring distributions of a gift when a beneficiary turns 25 or 30.

The Potential Downside of Guardianships

As noted above, a court may also establish a guardianship to manage any gift left to a minor. This can be problematic since the court, rather than the person making the gift or even the guardian, has final say on how to manage the funds. Trustees and custodians under the CUTMA, in contrast, are generally not subject to court supervision.

To illustrate the potential issues with guardianships, consider a recent California case. Here, a 10-year-old child received a direct benefit of $296,000 from another person’s life insurance policy. A probate court named the child’s parents as guardians but restricted the funds to a bank account. The parents, noting the bank paid little interest, wanted to move some of the money into an investment account. The court said no, citing the recent volatility in the stock market. The parents appealed, but the Court of Appeal said the parents lacked the authority to second-guess the terms of their guardianship.

This is why, if you wish to make any type of gift to a minor as part of your own estate plan, you should carefully consider the best way of ensuring any assets are properly managed on the child’s behalf. An experienced San Diego estate planning attorney can advise you on this and many other subjects. Contact the Law Office of Scott C. Soady if you would like to speak with an attorney right away.

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