As you plan for your family's future, it's important to think about what will happen to your children if you become incapacitated or pass away. In Michigan, minors can't directly inherit property or assets. This means it is crucial that you create an estate plan that takes this into account. A revocable living trust is the best estate planning tool for protecting your children.
Estate planning for minor children is not just something for wealthy families; it is something every parent should do. Because there are various ways children can inherit assets, it is important to understand the options and the best way to preserve your assets for your children. When you are ready to get started with estate planning, an experienced Michigan trusts and estates attorney like those at Great Lakes Family Probate & Estates, PLLC, can guide you through the process.
A Will Is Not Your Best Option
When you think about how you want your assets to be distributed upon your death, taking care of your minor children is your top priority. Bequeathing your assets to them in your will is a straightforward solution, but it's not always the best one since minors cannot actually take ownership of the assets while they are minors.
If you leave a legacy to your child in your will, a conservator must be appointed by the probate court. A conservator is a person who will manage the assets or funds until the child reaches age 18. This is not the same as a guardian, which is the person who will care for your child. A nomination of a guardian and conservator can be made in the will and then appointed made by a probate court. If you do not nominate a conservator, the court will assign one.
This person is likely to be:
- Your child's other parent,
- Your child's guardian,
- Your child's custodian, or
- Someone who would be adversely affected if the child's property is not managed correctly and who asks the court to be appointed
This last option places your child at risk of having someone who might not have their best interests in mind managing their finances. The conservatorship will be opened in, and managed by, the probate court in a time-consuming and expensive ongoing court process. You can avoid all of this by working with your attorney to create a revocable living trust.
Revocable Living Trusts Provide the Best Solution
Administering a will and appointing a conservator requires probate courts, which are complex, expensive, and public. Revocable living trusts can streamline the process and protect your child's privacy. When you create a revocable living trust you must transfer ownership of your assets to the trust while you are alive. You can continue using and managing your assets as you normally would, but the trust technically owns them. Nothing in your daily life changes. You live in your home, spend your money, and manage your investments.
Trusts are managed by a trustee. You can name yourself as the trustee and select someone else as the successor trustee who will manage and distribute the trust's assets if you become incapacitated or after you die. Because the trust is revocable, you can make any change you want and can even dissolve it entirely if you choose.
Trusts Protect Minors
A revocable living trust allows a trustee to manage your assets on behalf of your minor child until they reach the age specified by you. A trust provides both flexibility and ongoing control, allowing you to choose when your minor beneficiaries receive some or all of their inheritance.
You could “sprinkle” the inheritance over a period of years by setting the trust to release specified amounts of the principal to your child at specific ages. For example: 1/3 of the principal at age 22; 1/2 of remainder at age 25, and the remainder at 30. You can also set milestone criteria for receiving distributions from the trust, such as graduation from college, marriage, or the birth or adoption of a child. This ensures that your child does not inherit everything at age 18 and use it unwisely, creating an uncertain financial future.
You also have complete control over who the trustee is, ensuring that the person you choose will manage your child's assets with their best interests in mind. There is no court oversight – the trustee you name is the person who will handle the assets. The provisions of your trust take effect when you establish it so upon your incapacity or death, the assets are available to your children without any delay or court, ensuring your children are completely protected.
Other benefits of a trust include:
- The opportunity to specify asset allocations for the whole family, including a surviving spouse as well as your children,
- Simplicity, since most of your assets can be placed in the trust and managed there,
- A seamless transfer of trusteeship, avoiding the time and expense of probate, and
Special Needs Trusts
If you have a child with special needs, there is another type of trust you should consider. A special needs trust is an irrevocable trust that allows you to pass assets to a special needs child without interfering with their ability to receive Supplemental Security Income (SSI), subsidized housing, Medicaid, or other benefits intended for the disabled. The special needs trust will hold assets for the benefit of the special needs child, but the trust assets won't count in many needs-based benefit calculations. A special needs trust is often a good idea if you have a minor beneficiary who will need long-term care.
Other Assets That Transfer Assets to Minors
In addition to trusts, there are other assets that pass outside of probate. They might seem like an easy and direct way to leave assets to your minor children, but they are not the best options if you don't also have a trust:
- Life Insurance
Many people have life insurance policies naming their spouse or children as beneficiaries. You pay premiums on the account during your lifetime, and when you die, your beneficiaries receive the death benefit of the policy. However, minor children cannot receive these funds, so a conservator will have to be appointed by the court to manage the assets. If you have a trust, you can list the trust as your beneficiary on your policy. The funds will be paid directly to the trust and managed by your own chosen trustee.
- Retirement Account Beneficiaries
If you have a retirement account that allows you to name beneficiaries, you encounter the same problem you face with life insurance. A conservator will have to be appointed to manage the funds. Just as with life insurance, the safer route is to name your trust as the beneficiary of your retirement plan.
Gifts Under the Uniform Transfer to Minors Act (UTMA)
Recognizing that people with smaller estates may not want to commit the time or expense to creating a revocable living trust, Michigan has adopted legislation to allow minors to inherit or receive gifts of money without the need for a conservator. The Michigan Uniform Transfers to Minors Act allows minors to receive money or gifts through a special account that is easy to set up at any bank. A UTMA account is often the easiest way to leave money to a child for less complicated estates or smaller inheritances. You can transfer up to $15,000 to the account per year as an individual, tax-free, or $30,000 as a couple. Once assets are put in an UTMA account, only the custodian of the account can withdraw the funds and the funds must be used for the minor. Transfers to UTMA accounts are irrevocable.
When you set up a UTMA account, you name a custodian for the account, usually a family member. You can name yourself, manage the account during your lifetime, and then select an alternate who will step in if you pass away. The custodian for the UTMA account will have the right to manage, spend, and invest the minor's funds. The custodian has a duty to act honestly and in the minor's best interests, but they won't need court approval to manage the account.
In Michigan, a UTMA account must end between the ages of 18 to 21 (you can choose any point between those two ages). Once the account ends, the child becomes the sole owner of all the funds in the account and has complete control over them. While a UTMA account is easy to establish, it does not provide the same flexibility and protections as a revocable living trust.
If you create a revocable living trust, you will want to work with your attorney to create a pour-over will as well. A pour-over will is a simple will that ensures that anything you own when you die that is not included in the trust is automatically transferred to the trust. This is useful if you acquire assets and pass away before you are able to put them in the trust.
In Michigan, if you die without a will of any kind, intestate succession law will require all assets to be divided among your spouse and children. If you are in a second marriage and want to provide for your minor children, understand that your spouse will receive a large amount of your estate before your children receive anything. A trust combined with a pour-over will allow your children to receive the share of your estate that you decide, not the State of Michigan.
Concerned About Planning for Minor Beneficiaries?
Having a will isn't the best way to transfer your property to your minor children after you die. A comprehensive estate plan, including a revocable living trust, can help you plan for contingencies that may occur if something happens to you before your children are grown.
If you're concerned about providing for minor beneficiaries after your death and wondering how to protect them through your estate plan, it's time to consult a professional. At Great Lakes Family Probate & Estates PLLC, our team can help you provide for your children's futures and maximize the assets you'll pass on to them. We've been guiding Michigan clients through estate planning and proactive tax strategies for years, and we can help you too. Call us at 888-554-5373 or contact us online to set up your consultation.