How to Protect Inheritance Given to Minor Children

Attorney Kellen Bryant explains the critical mistakes parents make when leaving inheritances to minor children and reveals the best strategies to protect these assets.

If you have minor children (under age 18) and want to leave them an inheritance through life insurance or other assets, you need to understand a critical legal reality: most common approaches either fail to protect the assets or create expensive court complications. Here’s what every parent needs to know about properly protecting inheritances for minor children.

Common Mistake #1: Relying on Family Members

Many parents think they can solve the minor child problem by naming a trusted family member as the beneficiary with instructions to “hold it for the children.”

The Strategy:

Name your brother, sister, or other family member as the life insurance beneficiary, with the understanding that they’ll manage the money for your children’s benefit.

The Dangerous Reality:

This approach provides zero legal protection for your children. Here’s why:

• No legal obligation – Your brother has no legal requirement to share the money with your children
• Full legal ownership – Once your brother receives the life insurance payout, it’s legally his money
• No accountability – There’s no legal mechanism to ensure the money is used for your children
• Family dynamics – While we’d love to believe everyone does the right thing, sometimes they don’t

Even with the best intentions, circumstances change. Your brother might face financial difficulties, divorce, creditor problems, or simply change his mind about helping your children.

Common Mistake #2: Naming Minor Children Directly

The next logical step many parents consider is naming their minor children directly as beneficiaries on life insurance or other accounts.

The Strategy:

Name your 15-year-old child as the beneficiary of your $100,000 life insurance policy.

The Problem:

Life insurance companies cannot and will not write a check to a minor child. When you pass away, here’s what happens:

1. Company inquiry – “How old is this beneficiary?”
2. Age verification – “Oh, they’re 15.”
3. Company response – “We can’t give a $100,000 check to a 15-year-old.”
4. Legal requirement – “You must set up a court-supervised guardianship.”

The $15,000 Threshold

Most life insurance companies require court-supervised guardianships for any payout to minors exceeding $15,000. Since most life insurance policies exceed this amount, guardianship becomes necessary in almost all cases.

Why Court-Supervised Guardianships Are Problematic

While guardianships can protect minor children’s assets, they create significant complications:

Court Appointment Required

• Legal proceedings – Someone must petition the court to become guardian
• Judge’s decision – The court decides who manages the money (may not be who you would choose)
• Legal fees – Court proceedings cost money that comes out of your child’s inheritance

Ongoing Court Supervision

• Judge approval required – Every expenditure for the child must be approved by the court
• Detailed accounting – Guardian must regularly report to the court on all financial activities
• Limited flexibility – Court may restrict how money can be used for the child’s benefit
• Continuing costs – Legal fees and court costs reduce the inheritance over time

Practical Complications

• Delays – Court approval takes time, potentially delaying important expenses
• Documentation burden – Extensive paperwork required for every transaction
• Public record – Court proceedings are typically public
• Inflexibility – Difficulty adapting to changing circumstances

The Solution: Trust-Based Protection

The most effective way to protect inheritances for minor children is through properly structured trusts that avoid both the risks of informal arrangements and the complications of court supervision.

Option 1: Testamentary Trust Within Your Will

This is the traditional and most common approach for protecting inheritances for minor children.

How It Works:

1. Will creation – Your will includes a testamentary trust provision
2. Trustee appointment – You choose who will manage the money for your children
3. Life insurance designation – Name the trustee under your will as the life insurance beneficiary
4. Trust activation – When you pass away, the trust is created and funded

Key Advantages:

• Avoids guardianship – No court supervision required for day-to-day management
• Chosen trustee – You select who manages the money, not a judge
• Accountability – Trustee has legal fiduciary duties to your children
• Flexibility – Trust terms can be tailored to your family’s specific needs
• Legal protection – Children have legal rights if money isn’t properly managed

Important Consideration:

Testamentary trusts go through probate, which means:

• Court involvement in establishing the trust
• Public record of trust terms
• Potential delays in funding
• Probate costs reducing the inheritance

Option 2: Living Trust (Revocable Trust)

A living trust provides even better protection and efficiency than a testamentary trust.

How It Works:

1. Trust creation – Establish the trust during your lifetime
2. Trustee appointment – Choose successor trustees for minor children
3. Beneficiary designation – Name the trust as life insurance beneficiary
4. Immediate funding – Trust receives and manages assets without probate

Superior Advantages:

• Avoids probate entirely – No court involvement in trust funding
• Privacy protection – Trust terms remain private
• Immediate funding – No delays in accessing money for children’s needs
• Lower costs – Eliminates probate expenses
• Greater flexibility – Easier to modify trust terms if needed
• Comprehensive planning – Handles all assets, not just life insurance

Essential Trust Provisions for Minor Children

Whether you choose a testamentary trust or living trust, certain provisions are crucial:

Age-Based Distribution

• Staged distributions – Partial distributions at different ages (e.g., 25, 30, 35)
• Full distribution age – When children receive complete control
• Early access provisions – Emergency distributions for education, health, or other needs

Trustee Powers and Duties

• Investment authority – How trust assets should be managed and invested
• Distribution standards – Guidelines for when and how money can be used
• Accounting requirements – Regular reporting to beneficiaries
• Successor trustees – Backup choices if your first choice can’t serve

Special Considerations

• Educational expenses – College, graduate school, vocational training
• Health care needs – Medical expenses not covered by insurance
• Support standards – Maintaining appropriate lifestyle
• Asset protection – Protecting inheritance from creditors or divorce

Choosing the Right Trustee

Selecting the right person to manage your children’s inheritance is crucial:

Essential Qualities:

• Trustworthiness – Absolute integrity with money
• Financial competence – Ability to manage investments responsibly
• Relationship with children – Understanding of your values and your children’s needs
• Availability – Time and willingness to handle trustee duties
• Longevity – Likely to be available throughout the trust term

Professional vs. Family Trustees:

• Family trustees – Personal knowledge but may lack professional expertise
• Professional trustees – Expertise and objectivity but less personal connection
• Co-trustees – Combination approach balancing personal and professional management

Implementation Steps

To properly protect inheritances for your minor children:

1. Choose your approach – Decide between testamentary trust or living trust
2. Select trustees – Choose primary and backup trustees
3. Design trust terms – Work with an attorney to create appropriate provisions
4. Update beneficiary designations – Change life insurance and other accounts to name the trust
5. Fund living trust – If you choose a living trust, transfer appropriate assets
6. Regular reviews – Update trust terms as children grow and circumstances change

The Bottom Line

Protecting inheritances for minor children requires proper legal structures—informal family arrangements offer no protection, while direct inheritance to minors creates expensive court complications. The solution is creating either a testamentary trust within your will or, even better, a comprehensive living trust that provides professional management, legal accountability, and flexibility for your children’s changing needs.

Don’t leave your children’s financial future to chance or subject them to costly court supervision. Proper trust planning ensures your inheritance reaches your children safely and is managed wisely until they’re ready to handle it themselves.

For guidance on creating appropriate trust protection for your minor children’s inheritance, consult with experienced estate planning attorneys who can design structures tailored to your family’s specific needs and goals.