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Leaving a retirement account to a minor

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I have large retirement accounts and would like to name my grandchildren as the beneficiaries. It is my understanding that a minor (someone under the age of 18) cannot legally “own” money or bank accounts. Is that accurate? How should I handle contingent beneficiaries on my IRA and other assets? Should I write the names of my minor children or should I name their parents?

Leaving a retirement account to your grandchildren is a commendable way to leave a legacy for your family. If the beneficiary is designated, he may elect to “stretch” the inherited IRA (individual retirement account) over his own lifetime, allowing the asset to grow tax free within the account for presumably a long time. However the beneficiary will be required to withdraw what is called, required minimum distributions, the minimum amount he must withdraw from the account each year calculated based on his own (presumably younger) age immediately. The beneficiary will have to make an election for the stretch out within a relatively short period of time after the death of the account owner, otherwise the default is that the beneficiary must withdraw the entirety of the account over a five-year period.

Additional planning is advisable if the beneficiary is under the age of 18. Because a minor may not own property in his individual name, there is a high probability that the financial institution will require that a guardian of the property be appointed for the child in order to distribute the distributions. This would require a petition to the court, and an account held jointly with the Clerk of the Court such that approval would be required each time a withdrawal is desired. In other words the parent would not have unfettered discretion over the account. Also the child would be permitted to withdraw the entirety of the assets in the account when he becomes 18, which could be a significant sum.

There are two alternatives. First you may designate a custodian who can oversee the account until the grandchild reaches 18. At that point the grandchild could withdraw the entirety of the account, subject to significant income taxes on the withdrawal and losing the benefit of tax-free growth within the account.

If the individual retirement account is of substantial value, or if you are concerned about spendthrift behavior or wish to protect your grandchild’s inheritance, you can create what is known as a conduit trust in your will or in a living trust. You can then designate that conduit trust as the beneficiary of your account instead of the individual grandchild. When drafted properly, it allows the IRA to “look through” the trust and treat the minor as the designated beneficiary while still allowing a stretch-out of the account over the grandchild’s life. The distributions are paid to the trust, not to a guardian under court supervision, and they can then be used for the grandchild’s benefit by paying the grandchild’s parent or guardian, or a provider of services (such as a private school or college). The stretch-out can be as long as the trust allows, even for future generations.

There is also a technique known as an accumulation trust, however, the conduit trust has been approved by the Internal Revenue Service in various rulings and commentary, whereas the accumulation trust has not.

Keep in mind that the individual retirement account must be distributed only to the trustee of the conduit trust in order to preserve the integrity of the account.

These are complicated techniques that require specific drafting to ensure your objectives are met. You should always consult with a qualified estate planning attorney to determine a course of action that is right for you and your specific situation.

Alison Arden Besunder is the founding attorney of the law firm of Arden Besunder P.C., where she assists new and not-so-new parents with their estate planning needs. Her firm assists clients in Manhattan, Brooklyn, Queens, Nassau, and Suffolk Counties. You can find her on Twitter @estatetrustplan and www.besunderlaw.com.

Updated 4:58 pm, July 9, 2018
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