If you name minors as beneficiaries of your trust and/or your IRA you face a unique dilemma.
You may want to leave money to the kids. But you may fear they don’t have the experience or maturity to make smart decisions when it comes to cash.
This can be especially difficult when there are no adults that you trust enough to put in charge of the money.
What should you do?
Let’s resolve this problem by first looking at the trust money.
If you name minors as beneficiaries of the trust, you will have to find an adult that can administer the assets (at least) until they reach the age of majority or longer. You don’t have a choice.
This person doesn’t have to be the parent or guardian of the children but it must be someone you trust and someone over age 18.
Keep in mind that you can change this person as often as you like. Your trust is a living/breathing document. Nothing is cast in stone.
You can also name a professional trustee – although I don’ recommend it.
And remember – a miracle could happen. You might live long enough for the minor to become a responsible adult. This is exactly what happens most of the time.
What I’m saying is, when it comes to your trust, don’t get worked up over nothing. Do the best you can. Name the best trustee you can. Consider this issue well while you’re drafting your trust but don’t worry about doing it perfectly. You can always make changes later.
Your IRA beneficiary is a different story. If you name a minor as a beneficiary or contingent beneficiary, special rules apply.
If your IRA beneficiary is a minor when you die, the minor must set up a beneficiary IRA (because the minor (hopefully) isn’t your spouse). Different financial institutions treat this issue in various ways.
Some companies will allow the minor to set up the beneficiary IRA. When the minor does this, she’ll have to name a “custodian” who is over 18 years of age. This is the IRA equivalent of a trustee. This custodian signs the application and makes decisions about withdrawals on behalf of the minor.
The problem is that your financial institution will probably allow your minor to name anyone he or she wants as “custodian” of the account.
You may not want this.
For example….let’s say your 17 year old daughter names her 19 year old boyfriend as custodian. Is that really what you had in mind?
I don’t think so.
Take care of this now.
If you name a minor as beneficiary (or contingent beneficiary) in your IRA, amend the beneficiary document now. You can simply spell out (on that document) who you want the custodian to be for your minor beneficiary. While the financial institution isn’t obligated to honor your request, they probably will.
Problem solved…if you take action.
Note from Frugal Dad: Neal and I have discussed this very matter on several occasions as our family’s situation changed a bit after my mom’s death last year. We had to appoint a new trustee/guardian for our kids as part of the painful (but necessary) process of updating our wills. Because probate/estate law can vary from state to state, I highly recommend consulting an attorney and/or a certified financial planner in your area to help draft the proper documents.