How to Effectively Use Your Estate Plan to Leave Funds to a Minor

In a previous post (here), we described the problems associated with just leaving assets to a minor directly. Usually this happens through a will or trust or–more likely–as a designated beneficiary on some kind of investment account. But under Illinois law, and that of most other states, minors can’t hold property directly. Someone–like a guardian or trustee–must hold the property on their behalf.

The problem is, many people don’t understand this. They think they’re helping the children by leaving them money, which they may very well be doing. But they may also be unwittingly causing unnecessary headaches for the children’s parents or legal guardians.

Let’s back up a bit. As a society, we’ve decided that minors are unable to make informed decisions for themselves. Put aside for a moment the problems of whether that’s true for all minors (some are very mature), and that some adults can’t make good decisions, either. Those are posts for a different day.

Illinois Law and Minors Holding Property In Their Name

For now, we’re just focused on the general principle that, under Illinois law, minors are not allowed to hold property in their own names individually because we don’t want them making bad decisions about the funds, being taken advantage of, or squandering their inheritances. Because of this, we require that, if a minor is going to receive assets, those must be held on the child’s behalf by someone who has been given authority to do that. There are multiple ways that this can happen.

First, a judge could appoint someone to serve as the “guardian of the estate” for the minor. (Guardians of the estate can also be appointed for adults who are unable to care for themselves–those who have been adjudged incompetent, whether because of physical, mental, or emotional situations.) Judges are given authority to appoint guardians through the Illinois Probate Act (755 ILCS 5), which describes the rights and obligations of the guardian, as well as those of the minor. For instance, the Probate Act requires that the guardian act as “fiduciary” for the minor, holding, investing, and otherwise using the funds for the minor’s best interest and not the guardian’s.

The downside of having a guardian appointed, however, is that the guardian generally needs to come to court every year thereafter to account for the funds, explaining what the guardian has done with them. This is generally not an onerous task, but it can be somewhat of a hassle, especially when there are other ways to reach the same result without having to make the annual accounting.

Illinois Trusts, Funds and Minor Children

A second way that the funds can be held for the minor is by appointing a trustee to hold them for the minor. This can be accomplished in two ways. One is to create a trust before the grantor (the person making the gift) dies. The trust would then name the child as a beneficiary, would identify the purposes for which the funds can be used, and would name a trustee who will continue to hold the funds once the gift is made (usually on the grantor’s death, but sometimes when other conditions are also met). One advantage of creating a trust is that the grantor can put greater restrictions on how and when the funds are used. The grantor can also limit how much and under what conditions funds are distributed out. This gives the grantor more flexibility and control over the expenditure of the assets, as compared with the guardian’s powers, which are set by the court as allowed by the Probate Act.

Another advantage is that a trustee can be given authority to hold funds for adults even if they have not been adjudicated as incompetent by a court. Thus, if the grantor wants to make sure that individuals–even fully competent adults–only receive their inheritances under certain conditions, those conditions can be included in the trust.

And under the Illinois Trust and Trustees Act (760 ILCS 5), and similar statutes in most other states, the trustee would generally still have the same type of fiduciary duties that are required of a guardian appointed under the Probate Act. That is, the trustee does not have the right to use the funds for their own purposes, and has to manage and invest the funds appropriately and for the sole benefit of the beneficiary. Like a guardian, a trustee does have to make annual accountings to the beneficiaries, although those need not be made public by filing them with a court. Nor is a trustee, unlike a guardian, generally required to appear before the court annually to publicly account for the trustee’s actions.

Illinois Uniform Transfers to Minors Act

A third way that assets can be transferred to minors is by granting it to the minor pursuant to the Illinois Uniform Transfers to Minors Act (760 ILCS 20), or similar acts found in other states (sometimes called uniform gift to minors acts). Under these acts, funds are transferred to a particular individual, called a custodian, to hold for the benefit of the minor. Like the Probate and Trust Acts, the Uniform Transfers to Minors Act requires that the custodian invest the funds “as would a prudent person of discretion and intelligence who is seeking a reasonable income and the preservation of his capital.” And the custodian is also required to keep records of what the custodian has done with the funds, and make those records available to the minor’s parent or guardian (or to the minor if over the age of 14) “at reasonable intervals.”

A final way to transfer funds to a minor is to leave them jointly to the minor and some other person who is an adult. The downside of this, however, is that the co-owner (the adult) would have no obligation to the minor–no fiduciary duty–to either account for the funds or to use them for the minor’s benefit. This is because the co-owner would in fact be an owner of the funds, not merely a custodian or fiduciary holding them on the minor’s behalf. A co-owner could choose to hold them solely for the minor’s behalf. But if the co-owner failed to do so, the minor (or the minor’s parent or legal guardian) would have no recourse against the co-owner for wasting the assets.

There are many different ways to leave money to a minor, and many different purposes behind each. Contact us today so we can help you with your particular situation as you think about how best to leave your assets to those you love.

Charles Wentworth
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Charles Wentworth
Charles Wentworth
Charles is an attorney in Glen Ellyn, Illinois. After graduating from the University of Utah, he clerked for Chief Justice John T. Broderick of the New Hampshire Supreme Court. He then became a litigation associate at Kirkland & Ellis LLP before opening his own office and partnering with Rick Lofgren. He lives just outside of Chicago, where he participates in community activities, including Boy Scouts and little-league baseball.