One of the most difficult aspects of estate planning is determining how to leave your assets to young children and ensure they are taken care of in the event that you and the other parent prematurely die. There are several options for managing your children's inheritance, including establishing a trust. To help with your estate planning, here are options to consider for their inheritance.
The Uniform Transfers to Minors Act, or UTMA, gives you the option of leaving your assets to your children and providing for their care. Through your estate planning, you would choose a custodian to oversee your children's inheritance. For instance, if the inheritance includes life insurance, the custodian would be responsible for managing the funds until your children reach a certain age.
There are several advantages to an UTMA custodianship. For instance, someone you trust can make financial decisions for your children. If their guardian needs funds to care for them, the custodian can provide those without going through a lot of red tape.
Another advantage is that you can contribute as much as you want to the fund that is established. Relatives, such as grandparents, can even contribute to it once it is established. Once your children reach a pre-determined age, they can take control of the funds and have a solid financial start on their adult life.
An UTMA does have a drawback to consider. If the custodian mismanages the funds, your children's inheritance could be squandered. It is imperative that you carefully consider your selection to avoid this possibility.
A trust is always an option. The funds in the trust would be overseen by a trustee. To avoid mismanagement, some parents opt to use professional financial consultants, advisers, and planners to administer the trust. The trust could be turned over for the children to manage when they reach an age determined by you.
To protect your children's inheritance, you can opt to have more than one trustee. The trustees would have to reach a consensus before any financial actions can be taken.
A trust does require the filing of an income tax. Your trustee would be responsible for filing and paying any taxes that are required. To avoid penalties, ensure you have trustee who is able to take on the task of filing taxes and any other financial documents that might be required.
An attorney like John R. Lonergan, P.A. can help you find other ways to protect your children's inheritances.