Leaving Money or Property to Your Children

Choosing who raises your children if you die young is only half the job. You also need to think about what happens to any money or property they inherit from you. Who looks after it until they're old enough to handle it on their own? In short: you need to line up someone to manage that inheritance, in case it lands in your children's hands before they're grown. You can set this up right inside your will or living trust.

This overview draws on reporting originally published by attorney Betsy Simmons Hannibal. Because inheritance and trust rules vary by state, check your own state's law or talk with a local estate planning attorney before finalizing your plan.

• What happens if you skip this step
• Your options for leaving money to a minor
• Picking the right age for them to inherit
• What to do next

What happens if you skip this step

If you don't name someone to manage property for your minor children (anyone under 18), the probate court will pick a "property guardian" for you. Courts often choose the surviving parent, but that's not guaranteed.

This default setup brings extra friction. Court-appointed guardians typically have to file regular reports and can't make many decisions on their own about how to handle the property. There's one workaround: for smaller amounts, many states let an executor appoint a custodian for a minor beneficiary under the Uniform Transfers to Minors Act, which we'll get to below.

If your children are already 18 or older when they inherit, they get full control of the property right away — unless your will or trust says otherwise.

Your options for leaving money to a minor

The good news: you don't have to leave things to chance, or worry that a young adult beneficiary will blow through an inheritance. You can decide now who will manage any property your minor or young adult children eventually inherit. There's more than one way to do this — here are four of the most straightforward.

1. Name a property guardian in your will

The simplest option is naming a property guardian for your child directly in your will. If your child needs one when you die, the court will typically appoint that person. This guardian steps in to manage whatever the child inherits — from you or anyone else — as long as there's no trust or similar arrangement already handling it.

2. Name a custodian under the Uniform Transfers to Minors Act

The Uniform Transfers to Minors Act (UTMA) is on the books, in largely the same form, in every state. It lets you name someone — a custodian — to manage property you leave to a child. If you die while the child is still under the age your state sets (21 in most states), the custodian takes over managing it. Kids who've already passed that age inherit outright.

Setting up a custodianship is simple: just name a custodian and specify the property going to the young person. You can do this in your will, your living trust, or when naming a beneficiary on a life insurance policy. For example, a will might read: "I leave $10,000 to Michael Stein, as custodian for Ashley Farben under the Illinois Uniform Transfers to Minors Act." That single sentence is enough to create the custodianship if it's ever needed.

Most states end a UTMA custodianship at 21. A few cut it off at 18, and some let you push it as late as 25. If you'd rather your child wait longer than that, a trust — covered next — is a better fit.

Using life insurance to provide for your children

A UTMA custodianship or a child's trust can also manage life insurance proceeds left to young children. Before buying a policy for this purpose, think through whether you actually need one and which type makes sense for your situation.

3. Set up a trust for each child

Another route is creating a separate trust for each child. Your will or living trust names a trustee — often a trusted relative or friend — who manages whatever the child inherits until they reach the age you choose. If the child is already past that age when you die, the trust never has to kick in; the property passes straight to them.

The trustee is bound to act in the child's best interest and to follow the instructions you leave in writing. Generally, they can tap the trust for the child's health, education, and living costs. Once the child reaches the age you set, the trustee closes out the trust and hands over whatever's left.

Running a trust is more involved than serving as a UTMA custodian. Trustees must file annual tax returns for the trust, and because their authority comes only from the will or trust document itself, they may need to show that document (or the relevant part) to banks and other institutions. UTMA custodians, by contrast, operate under powers spelled out in state law — powers most banks already recognize.

Delaying when a child receives their inheritance

If your children stand to inherit a substantial sum, you might not want them getting full access at 18 — plenty of 18-year-olds wouldn't handle a windfall the way you'd hope. A trust is the best tool for stretching out the timeline. A common structure splits the money into three payouts: one around college graduation or age 22, another a few years after that, and a final one around age 30. Until the money is fully distributed, the trustee can use it for whatever purposes you spell out, such as education or healthcare.

4. Set up a single "pot trust" for all your children

If you have more than one young child, you might prefer one shared trust instead of separate ones — often called a pot trust or family trust. Your will or living trust creates the trust and names a trustee, who decides how to distribute money among the children as needed. The trustee doesn't have to split things evenly; they give each child what that child needs. The trust ends once the youngest child hits a set age, usually 18.

A pot trust hands the trustee a lot of flexibility, along with real responsibility. The tradeoff: older children can't collect their share until the youngest turns 18, which could mean waiting well into adulthood for full control of their inheritance.

Example of a pot trust

Nick and Nora have three kids, ages 4, 5, and 10. Each names the other as primary heir in their will, with the children as backups. If both parents die and the kids inherit everything, the wills call for a single pot trust to hold it all. Nora's sister Chloe, named as trustee, decides how much of the trust money each child needs and when.

Picking the right age for them to inherit

When you're deciding at what age your children should receive their inheritance, start with the size of it. If the money would realistically be spent by the time a child finishes college anyway, you probably don't need an elaborate long-term structure.

Weigh your child's maturity too. Some young people can handle a large sum responsibly early on — many can't. Overspending isn't the only risk; a child with no investing experience can watch money quietly disappear. And getting used to receiving money without earning it can make it harder to learn to budget and save later.

Some parents, uneasy about their children's judgment, build in management arrangements that withhold control until the kids are middle-aged or older. But holding the reins from beyond the grave until a child turns 40 can breed resentment rather than gratitude — probably not the legacy you're aiming for. Paying a trustee to manage funds for decades also adds up. At some point, it makes sense to let go.

What to do next

If you're ready to put a will or trust in place to protect your children in case you die unexpectedly, it may help to work with an estate planning attorney or a reputable will-making service to get the right documents drafted for your state.