Appointing a Personal Guardian and Leaving Property for Minor Children
Generally, when a biological or adoptive parent dies, the surviving parent has the right to have sole custody of the child, which the court will award unless the surviving parent has legally abandoned the child or is considered unfit as a parent.
If the surviving parent is not suitable to take custody of the child or if the surviving parent dies, then someone will have to take care of the child and some arrangement will have to be made for the child's financial support. However, money or property cannot simply be left to minors, because state law restricts the amount of money or property that minors may own, nor can minors receive the proceeds of a life insurance policy.
Generally, a minor, who is anyone younger than 18 years of age, is not legally permitted to own property or receive money with a value greater than $2,500-$5,000, depending on state law. Money and property must be managed by an adult, who is usually the personal guardian of the children, but it can also be someone else acting as property guardian for the minor.
In most states, a personal guardian for the child can only be appointed by will and the financial support that has been provided for the child should also be mentioned in the will, even if the support is being provided by a trust or some other arrangement. Otherwise, the omitted child will be entitled to some portion of the deceased parent's property under the omitted child doctrine. Since some states specifically define omitted child as one who is not mentioned in the will, omitted child laws may apply even when the child's financial needs are provided for by a trust. Hence all children should be listed in the will and their source of support should be mentioned if it is not otherwise provided by the will.
Several options exist for leaving property to minor children:
- a custodianship under the Uniform Transfers to Minors Act or, in South Carolina or Vermont, the Uniform Gifts to Minors Act;
- a child's trust;
- family pot trust;
- property guardianship;
- educational accounts, such as a 529 plan or a Coverdell account.
A donor can also use these methods to leave property to children who were not his own.
There must be a personal guardian appointed for minor children, unless they are emancipated, which is defined by state law, but usually requires that the child be within a few years of reaching the age of majority and that they are already living independently, such as being married or being in the military service, or showing any other independence that would allow a court to validate the emancipation.
If one parent dies but the other is still alive, then the surviving parent will be awarded custody of the children, unless there is an evident reason not to do so, such as the surviving parent is in prison, is obviously unfit as a parent, or because the surviving parent does not want custody. If the surviving parent is granted custody, then the will of that parent will determine who the personal guardian will be if the surviving parent dies before the child reaches the age of majority.
If there is no will or the will does not appoint a personal guardian, then the court will appoint one.
In the vast majority of states, only a will — not a living trust or any other type of document — can be used to name a child's personal guardian. However, the personal guardian that is appointed by the will does not become the legal guardian until approved by the court. The judge does have the authority to name someone else if she is convinced that it is in the best interest of the child. However, the court will generally approve the nominee if the nominee has no obvious problems, such as alcoholism, a criminal background, or child abuse history, and if no objections have been filed. An alternate personal guardian should also be selected, if the first cannot serve or refuses to serve.
Tips For Selecting A Personal Guardian
- Select only a single personal guardian so that there is no conflict between co-guardians. However, it may be beneficial to select a couple if they are stable and loving.
- Consider the wishes of the minor, especially since many states allow a child, 14 or older — in some states, 12 — to challenge the appointment of the guardian, in which case, a court hearing will be held to resolve the issue that may result in the appointment of a new guardian.
- Guardians are not required to support the minor financially. Therefore, sufficient funds should be available, usually from a trust, to support the child. If there is a trust, then the trustee should be permitted to distribute income or principal to the guardian for the proper support of the child.
- Be certain that the guardian will want to serve, and select a successor guardian in case, for whatever reason, your 1st selection cannot serve. The guardianship appointment may be more desirable if the will stipulates that the guardian does not have to post a bond or be obligated to file annual reports with the court.
- If a same-sex partner is nominated as the personal guardian, then it would be wise to have that person adopt the child so that it cannot be disputed. Those states that recognize same-sex marriages or unions will likely respect the appointment of the guardian, but if the guardian would happen to move to another state, the guardianship may not be as protected.
Because a child cannot own more than a minimal amount property, which usually ranges from $2,500-$5,000, depending on state law, a property guardian or custodian must also be appointed to manage the property for the child.
If there is no will or the will does not appoint a property guardian and there is no other means of managing the property for the child, such as a trust, then the court will either appoint a property guardian or a conservator. A property guardian cannot sell any property without court approval and must give a regular accounting. A conservator takes title to the property as a trustee, and thus, does not need court approval to sell property, but is still required to give an annual accounting.
Generally, the property guardian is also the personal guardian for the children. However, sometimes it is wise to appoint someone different for the property, if the property has to be managed or if the personal guardian is not financially savvy. Different property guardians can be named for different children without court approval.
Using a property guardian has disadvantages:
- the property must go through probate;
- property guardians are subject to court review, reporting requirements, and strict rules as to how they can spend the funds, which usually requires hiring a lawyer, which will be paid for out of the minor's funds;
- the property guardianship must end at age 18.
Although not as advantageous as a trust or UTMA custodianship for leaving property to minors, it is generally wise to name a property guardian as a backup in the will, because sometimes property is acquired that was not put in the trust or custodianship before the donor dies. Naming a property guardian can help these cases if the minor children earn a substantial amount of money, or receive a large gift that does not name the property manager, or if the minors receive property after the will or trust has already been executed and before the documents were amended, then the property guardian can manage these assets.
Tips for Selecting a Property Guardian
- Choose a property guardian who is not also the personal guardian, to provide checks and balances.
- If a new child is born after the estate has already been planned, then it should be changed to provide for the newborn child, otherwise the law of the omitted child doctrine will take effect.
- Choose a property guardian who is likely to live as long as the children are minors and that your family respects.
- If possible, don't select banks or other financial institutions to be the property guardian, since they charge many fees, and are not interested in small estates. Only select a financial institution if you have no one you can trust.
Uniform Transfers To Minors Act
Gifts to a child can be transferred in a will or living trust under the Uniform Transfers to Minors Act (UTMA), which has been adopted by every state except South Carolina and Vermont, which uses the similar, older Uniform Gifts to Minors Act (UGMA). Under the UTMA, the child's property guardian is called a custodian and his management must end when the minor reaches 18 to 25, depending on state law. An adult custodian is appointed by will or by living trust to be responsible for the property until the statutory age when the child must receive the property.
The appointing document specifies that the custodian is to act under the Uniform Transfers to Minors Act. A successor custodian can also be named, if the first choice either cannot or will not serve. A UGMA custodianship is less desirable than under UTMA because the UGMA custodian is more closely supervised by the courts, requires court approval to transfer assets, and must regularly provide an accounting to the court, which increases legal expenses.
The UTMA custodian has great discretion to control and use the property for the child's interest — to collect, hold, manage, invest, reinvest the property and to spend as much of it as necessary for the use and benefit of the minor. The custodian must also keep records so that tax returns can be filed and must otherwise act as a prudent person would.
The custodian is entitled to reasonable compensation, but does not need to file a separate income tax return. No court supervision of the custodian is required. The UTMA requires that only one person be named as custodian for each minor. When the child reaches the age specified by the act for termination, then the child must receive the balance of the gift. The custodian must also furnish an accounting of all funds distributed. In most states, the custodianship ends when the child reaches age 21, and in a few states, 18.
Tax Saving Educational Investment Plans
Federal law provides 2 different plans to help pay for a child's education: 529 plans and Coverdell accounts.
The 529 plan, which is named after the section of the Internal Revenue Code that governs them and is also called a qualified tuition program, is a tax-free investment account established to pay for higher education expenses of the named beneficiary, who must be a family member, including children, grandchildren, nieces and nephews, or other relatives. Income accumulates tax-free. No tax is paid for money distributed from the 529 plan if it is for qualified higher educational expenses, which includes tuition, books, fees, supplies, equipment necessary to attend college, graduate school, or vocational institutions, and can also include special services for a disabled student. Up to $14,000 per year can be contributed to the 529 account for each individual free of gift tax by using the annual exclusion for gifts, which is adjusted for inflation, and a married couple can double that amount. A person can also contribute $70,000 in 1 year and a couple can contribute $140,000, equal to the gift tax annual exclusion for 5 years. Any additional contributions during the 5-year period will be subject to gift tax. If a donor does contribute 5 × annual gift exclusion in 1 year, but dies before the 5-year period, then the amount of the annual exclusion for those years after the death are added back to the estate of the donor.
A new beneficiary can also be named for the account, if it is necessary or desirable.
Taxes and penalties will be assessed if the money from the 529 plan is withdrawn for non-educational purposes.
Tax Tip — State Tax Deductions and Credits for Contributions to 529 Plans
The 34 states and the District of Columbia that offer tax deductions or credits for contributions to 529 plans generally do not require that the money be in the plan for a specified amount of time. Therefore, if a benefactor wanted to pay the educational expenses of a family member, either from his own cash reserves or through a loan, then significant tax savings may be achieved by first putting the money into a 529 plan, then withdrawing the money to pay the educational expenses.
Fees and Drawbacks to 529 Plans
The fees and costs of 529 plans vary widely. State law governs 529 plans and you can only invest in state authorized plans. Each state has a plan specifically managed by an investment company or other companies selected by the state. Some states only allow residents to invest, but most states allow anyone to invest in their plan. About half the states allow residents to deduct state plan contributions from their state income tax.
Generally, annual expenses for management of the account are high. For instance, annual administrative charges exceed 2%. Investment choices are limited to options allowed only by the state, which, in some cases, maybe only 1 or 2 mutual funds.
Coverdell educational savings accounts were formally known as educational IRAs, because they work much like a Roth IRA. The person can contribute up to $2000 per year, but it phases out for people with larger incomes. The $2,000 is the total amount that can be set aside in one year for any one beneficiary — multiple contributions from different family members cannot total more than $2,000. Contributions are not tax-deductible, but income and appreciation are not taxed for qualified withdrawals to pay for educational expenses. The main advantage of a Coverdell account is that the money can be invested in any way that the donor desires. Generally, Coverdell accounts are preferable for families that cannot contribute a lot of money.
Naming Children As Beneficiaries Of Life Insurance
Minors cannot receive the proceeds of a life insurance policy, so if no other means are provided, then the court will appoint a property guardian, who will be subject to court supervision, reporting requirements, and other stipulations under state law.
However this can be avoided by naming a custodian under UTMA — insurance companies generally have a form for doing this and a separate form must be filled out for each minor. For more than one child, the percentage that each should receive should be specified.
The other alternative is to leave the proceeds using a child's trust or family pot trust as a part of the living trust. However, because insurance companies require that the beneficiary exist at the time of death, the trust must already exist, and thus, cannot be created by will.
Using Trusts to Support Minors
Trusts can be used to support minors and the tax code provides for several types of specialized trusts for minors, where gifts to the trust can be free of gift tax or generation-skipping transfer tax. Additionally, trusts may provide greater flexibility and some types of trust can continue for the lifetime of the beneficiaries or they can be used to support other beneficiaries. Moreover, more than one trustee can manage the trust and it is easier to change trustees. More information is provided in Trusts for Minors.