Updated: 2020-09-14 by
Until a child is eighteen years old, they can't inherit property in their own name. Instead, an adult needs to manage that property until the child can manage it for themselves.
A child can inherit property in several ways. If a person dies, and leaves behind a Will or a trust, and names that child as the beneficiary, then it will be the Trustee's job to manage that child's property according to the terms of the document. If a person dies and makes a gift to a child under that person's state's Uniform Transfers to Minors Act, the child's money will be placed in a custodial account for that child's benefit to a certain age. Finally, if a person dies and leaves money to a child directly, or names that child as a beneficiary of a life insurance policy or a retirement account, a court will need to appoint a property guardian to manage that child's money to age eighteen.
Child as Trust Beneficiary
If a child is the beneficiary of a trust, the Trustee will need to get a tax identification number for that child's trust, open up a bank or brokerage account in the name of the trust (using that new tax id number), and then distribute the assets to the child as directed by the trust.
For example, if a child is the beneficiary of a trust to age twenty-five, and the trust directs the Trustee to distribute the money for that child's, "health, education, maintenance, and support," (which would be a typical distribution standard), it will be the Trustee's job to distribute money to that child until the child turns 25. After that, the trust would terminate, and the child would be in charge of managing and distributing the money themselves.
It will be the Trustee's job to file a fiduciary tax return for this trust each year, to keep good records of how the money has been invested and spent, and to communicate with the child/beneficiary, to make sure that the money is being adequately distributed and well spent.
Gift to Child Under the Uniform Transfers to Minors Act
Sometimes people leave gifts to children without creating a trust to hold that money. The simplest way to do this is to leave money for a child under what's called the Uniform Transfers to Minors Act. Each state has a version of this law, which allows an adult, called the "custodian" to manage assets for children to a certain age.
A Will, for example, might leave a gift to a child this way: "To my dear nephew, Philip, I leave a gift of $12,000 to Sarah Jackson, as custodian for Philip Jackson, under the New Jersey Uniform Transfers to Minors Act to age 18."
Each state sets a time limit for UTMA accounts that are established by Will or trust when someone dies. In New Jersey, the age limit is 18-21, which means that a UTMA account established in New Jersey must end before the minor reaches age 18-21. The trust or Will would specify what age within this range applies. For example, a Will might say, "I leave a gift of $25,000 to Jennfier Jones, as custodian for her son, Jimmy Jones, under the New Jersey Uniform Transfers to Minors Act, to age 18."
The custodian of an UTMA account has the right to collect, hold, manage, invest and reinvest a minor's property. They must act honestly and prudently and they don't need a court's approval. The money in an UTMA account, which can be opened at a bank or a brokerage company, can be used for the minor's benefit like education or travel or reallly anything that the minor may need.
When the custodianship ends, the money belongs to the beneficiary, outright, to be used however they want to use it. All assets that are transferred to minors are irrevocable once made -- if a child decides not to go to college, for example, the money is still theirs when the account terminates.
UTMA accounts can also be created by the executor (if there is a Will) or trustee (if there is a trust), if he or she needs to transfer property to a minor, but the Will or trust didn't name a custodian.
In most states, this can be done unless the account exceeds a certain dollar limit, in which case the court must approve the transfer. In New Jersey, an executor or trustee can establish an UTMA account this way:
A custodial account may be established by an executor or Trustee that ends at 18. However, if the amount that is gifted to the minor is more than $10,000, the court must approve it.
Gifts to Children That Require a Property Guardianship
If assets are left to minor children and no custodial account or trust was established to manage that property, the probate court will need to appoint a property guardian to manage that property until a child turns eighteen.
For example, if a person names a minor child as the beneficiary for their life insurance policy, and dies, that child will not be able to inherit the $50,000 proceeds until a property guardian is appointed to manage that money for them until age eighteen. Or, if someone dies without a Will and their minor children inherit their property, a court will need to appoint a property guardian for each child, to manage that property to age eighteen.
Being a property guardian is like being the custodian, or Trustee, because it is their job to carefully manage the money for the benefit of the minor. But, unlike a custodian or a Trustee, the property guardian's job must terminate when the child turns eighteen because that's when the court's jursidiction over that child terminates. Also, unlike a custodian or a Trustee, the property guardian has to file formal accountings with the court, showing how the money was invested and distributed, and, in some cases, the money must be invested in certain, restrictive accounts.
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