What To Do When Your Beneficiaries Are Minors

The following is a guest post by Neal Frankle. He’s a Certified Financial Planner and blogs at Wealth Pilgrim. Neal writes about taking action steps to improve clients’ financial situations and finding balance at the same time.

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.

The solution?

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.


  1. Chances are if the minor you named is still young they will also need a legal guardian. This would also be someone you trust, why wouldn’t you just skip this hassle and change the name to that adult person?

  2. So many people don’t want to admit their mortality. Making out wills and other documents to take care of things = admitting that I’m going to die for the vast majority of the population. An attorney friend of mine says that people tell him all the time that “Oh my relatives won’t fight over my estate” which is another common fallacy. If there’s money involved, they’re more likely to burn up the entire estate trying to get some of it. The only ones who make out in that situation are the lawyers.

  3. I didn’t know I needed to name a custodian for my little sisters (they are my backup beneficiaries of my husband and I die at the same time). I assumed my parents were their legal guardians and that would be that…huh. Thanks!

    • It’s important to name both a legal guardian (for your own minor children) and a trustee to manage the proceeds from your estate entrusted to your minor beneficiaries. They do not necessarily have to be the same person.

      For instance, you may someone great with kids and someone great with money, but neither has both qualities.

      In the absence of a named guardian/trustee, the state appoints one, and obviously it may not always be your first choice. Best to put it in writing and make things official.

  4. I had not realized that the law permitted a minor to go naming the custodian of certain funds they inherit. It seems like a risky operation, considering that one can’t even have an unsecured credit card until s/he is 21!

    This has definitely given me a homework assignment. I’ll be looking into the law regarding what would be bequeathed to my son. Thanks for the heads up!

  5. Both my parents had a parent die. My mother’s father (who had been an orphan) did not do a will and my grandmother lost everything to “well meaning” friends who ran their store into the ground.
    IF my grandfather had a will- my uncle could have inherited the store with my grandmother….no will…no store.
    My grandmother had no will and my grandfather refused to have other family members help- leaving my father for years with a housekeeper. Sad way to grow up.
    I must say that my family’s experience with “trusted custodians” is not a good one. Look closely at family – they will probably have more good guidance for your children than the local bank or the lawyer in the next office!

  6. Looks like lots of people are confronted with this issue.

    I love Jason’s comment. The guardian for your children may be someone different than the trustee of your assets.

    I would never name the adult the beneficiary when I really want my kids to get the money. If I did that, the adult would become the owner and my kids would be left out to dry.

    Even if the adult is well meaning, they can’t transfer the IRA back to the kids without it being a tax nightmare.

    Great comments. Thanks for allowing me to write for FD. I LOVE THIS BLOG!

  7. If a grandparent who had left left money to 2 minors died and tragically one of them died before inheriting where does the money go? VERY Very grateful if you cd answer this.