February 19, 2010

Inheritance Rghts of Children

Individuals often wish to leave part of their estate to a child, whether it is their child, a niece, nephew, grandson, granddaughter, cousin, etc. 

This transfer of assets is not very complicated if the child is considered an adult, namely the child is at least 18 years of age. However, if the child is under the age of 18, he or she is considered a minor. Fam C §6500.

Consequently, in the eyes of the law, minors lack legal capacity in certain aspects. For example, minors cannot consent to their own medical treatment with certain exceptions nor can they contract or exercise the rights and powers of ownership over property. Fam C §§6920-6929; Fam C §§6700-6753. Furthermore children, specifically teenagers, are notoriously imprudent spenders of money and thereby the danger of a teenager squandering their inheritance after a few trips to the local mall is readily apparent.

In light of a child’s legal handicaps and propensity for wasteful spending, there are various options an individual can exercise to ensure that the child’s inheritance is secure.

1. Less than $5k

If the individual is not the mother or father of the child, they may deposit with the child’s parent up to $5,000 that will to be held for the child's benefit until he or she reaches the age of 18. Prob C §§3400-3402.

2. Over $5k

If the bequest is over $5,000, a court may authorize that the money be deposited in a blocked account or may authorize the purchase of a single-premium deferred annuity. Prob C §3413(a). Withdrawals may not be made from the blocked account except on court order and the balance must be paid to the minor at age 18. Prob C §§3300, 3413(a).

3. California Uniform Transfers to Minors Act (CUTMA)

An individual may establish a custodianship for the child’s benefit with a bank or brokerage firm through the California Uniform Transfers to Minors Act (CUTMA). Prob C §§3900-3925. Of particular significance, in a CUTMA account the individual can delay the child’s ability to access the money up to the age of 25. Prob C §3920.5.

4. Trust

An individual may establish a trust for the benefit of the child that can last for the entire child’s life if sufficiently funded. Please see prior postings on trusts on this blog and my website for further detail.

5. Guardianship

If no prior planning has been made for the child’s inheritance, a guardianship of the child’s estate may need to be established. In a guardianship, the court appoints a person to oversee and manage the child’s property. This is probably the worst arrangement because a guardianship requires the filing of an annual accounting with the court which is quite expensive. Prob C §1513.2.

6. College Savings Account

An individual may create an education savings account by either starting a college savings account (See Internal Revenue Code Section 529) or a Coverdell Education Savings Accounts (See Internal Revenue Code Section 530).