Planning for your child’s financial future is one of the most important steps you can take. If you have a retirement account, you might assume that naming your minor child as the beneficiary is the best approach. However, without proper planning, this decision can create legal and financial challenges.

At Battaglia, Ross, Dicus & McQuaid, P.A., we’ve helped countless families navigate estate planning with minors in mind. Our Florida estate planning lawyers know how to set up inheritances. They protect children and help assets move smoothly. This guide will walk you through everything you need to know.

Why Minors Can’t Inherit Retirement Accounts Directly

Many parents want their children to inherit their retirement savings. However, minors can’t legally control these funds until they reach adulthood. If a retirement account is left directly to a minor, a court-appointed guardian must manage the money until the child turns 18 (or 21 in some cases).

Without a solid plan, this can lead to:

• Unnecessary legal delays
• Higher legal costs
• Loss of control over how the funds are used

Additionally, once the child reaches the legal age of adulthood, they gain full control over the inherited funds. Without structured guidelines, they could spend the money unwisely or face financial mismanagement. Careful planning ensures that the funds are used responsibly for long-term security.

The SECURE Act and Its Impact on Inherited Retirement Accounts

The Setting Every Community Up for Retirement Enhancement (SECURE) Act significantly changed how inherited retirement accounts are handled. The SECURE Act says that most non-spouse beneficiaries, such as minors, need to withdraw all the money from an inherited IRA or 401(k) within 10 years after the account holder passes away.

Key SECURE Act Changes Affecting Minors:

• No more “Stretch” IRA: Beneficiaries used to take small payments throughout their lives. Now, they must deplete the account within a decade.
• Exception for Minor Children: Minor children can take required minimum distributions (RMDs) based on their life expectancy. However, the 10-year rule starts when they reach the age of majority, which is either 18 or 21, depending on the state. This exception is only applicable to the account owner’s minor child or children, and not just any minor beneficiary.
• Higher Tax Burden: Big payouts quickly might move minors into a higher tax bracket. This can cause large tax bills.

These changes make trust planning more important for families. They want to ensure their children have financial stability.

Best Ways to Plan for a Minor’s Inheritance

1. Establish a Trust for Your Child

One of the best solutions is to create a trust. A trust ensures that the retirement funds are managed according to your wishes until your child reaches an appropriate age.

Benefits of a trust:

• Control: You decide when and how your child receives the money.
• Protection: Funds remain safe from misuse or external threats.
• Tax Efficiency: Properly structured trusts can minimize tax burdens.
• Financial Guidance: A trustee can provide oversight to ensure the funds support the child’s long-term needs.

There are different types of trusts to consider:

• Revocable Trust: You can modify or cancel this trust during your lifetime.
• Irrevocable Trust: This trust can’t be changed after it’s set up, but it offers better asset protection.
• Testamentary Trust: This trust starts after you pass away and is set up in your will.

If you wish to establish a trust, it is important to consult with an estate planning attorney to draft the trust in a way that utilizes strategies to protect your child’s inheritance while also minimizing taxes through careful planning. Not all trusts are structured the same way, so retirement accounts need special considerations.

2. Name the Trust as the Beneficiary

Once you create a trust, you should name it as the beneficiary of your retirement account. This ensures that funds are transferred into the trust rather than directly to the minor.

When doing this, make sure:

• The trust is properly drafted to receive retirement account funds.
• It meets IRS requirements to qualify as a designated beneficiary.
• It includes terms for gradual or conditional distributions.

3. Choose a Responsible Trustee

The trustee will oversee the management and distribution of your child’s inheritance. This should be someone you trust to act in your child’s best interest.

A trustee should:

• Have strong financial judgment
• Understand your wishes and goals
• Be willing to manage the trust responsibly

If you’re unsure who to choose, a Florida estate planning attorney can help you select the right trustee. You might think about hiring a professional fiduciary or corporate trustee. They can help with fair and expert financial management.

4. Consider a Custodial Account

Another option is setting up a Uniform Transfers to Minors Act (UTMA) account. This allows a designated custodian to manage the funds until the child reaches the legal age of maturity. While this is simpler than a trust, it offers less control over long-term use.

Understanding the Difference Between Role Names

When planning an inheritance for kids, it’s important to know the key roles in estate planning. A beneficiary gets the assets. A trustee manages those assets in a trust. Additionally, a guardian is appointed to care for the minor in the event of the parent’s passing, whereas a custodian handles financial matters for the child if a custodial account is used. Knowing these differences helps make sure your estate plan matches your wishes. It also ensures that all important roles are assigned correctly.

Additional Considerations When Planning for a Minor’s Inheritance

Understanding Tax Implications

Different inheritance structures have varying tax consequences. A properly structured trust can minimize income tax burdens for your heirs. Distributions from inherited retirement accounts often incur income tax. Still, with smart planning, you can reduce your tax burden.

Consider these tax strategies:

• Stretch IRA Strategies: Allows beneficiaries to take distributions over their lifetime, reducing yearly tax burdens, if they are considered eligible designated beneficiaries. Eligible designated beneficiaries are beneficiaries that, if they are within a special class of individuals, such as a spouse, chronically ill or disabled beneficiaries, or beneficiaries that are no more than 10 years younger than the account owner, can stretch distributions over their life expectancy. Structuring your retirement beneficiaries with this in mind is crucial when preserving the special rules for eligible designated beneficiaries and should be done with the help of legal counsel.
• Roth Conversions: Converting traditional retirement funds to a Roth IRA can allow tax-free distributions for heirs if properly planned for in advance and before death.
• Charitable Trusts: Designating a portion of assets to charity can provide tax advantages while supporting meaningful causes.

Planning for Special Needs Children

If your child has special needs, additional planning is necessary. A Special Needs Trust (SNT) provides financial support. It helps people stay eligible for government benefits like Medicaid and Supplemental Security Income (SSI). It’s important to work with a Florida estate planning attorney who knows special needs planning. This helps create a legally sound plan.

Common Mistakes to Avoid

Naming a Minor as a Direct Beneficiary

Without a trust or custodial arrangement, a court must appoint a financial guardian to manage the funds. This process can be expensive and time-consuming.

Failing to Update Beneficiary Designations

Your estate plan should always reflect your most recent wishes. If you fail to update your beneficiary designations, funds may go to an unintended party.

Not Considering Tax Implications

Different inheritance structures have varying tax consequences. A properly structured trust can minimize income tax burdens for your heirs.

FAQs About Minor Beneficiaries and Retirement Accounts

Planning for minors to inherit retirement accounts can be complex. Below are answers to common questions families often ask:

1. Can I name my minor child as a direct beneficiary of my retirement account? Yes, but it’s not recommended. Minors can’t manage these funds. A court-appointed guardian must oversee them until the child becomes an adult. A trust is often a better solution.

2. What is the best way to leave retirement assets to a minor? Setting up a trust is typically the best way. A properly structured trust ensures funds are distributed according to your wishes and protects the assets from potential mismanagement.

3. What happens if I don’t designate a guardian or trustee? Without a designated trustee or guardian, the court will appoint one, which may lead to delays, added expenses, and less control over how the assets are managed.

4. How does the SECURE Act affect my minor child’s inheritance? The SECURE Act says that most inherited retirement accounts must be emptied within 10 years. However, minor beneficiaries can take smaller amounts until they become adults. After that, the 10-year withdrawal rule applies.

5. Can I change my beneficiary designations after setting up a trust? Yes, you can update your beneficiary designations at any time to ensure they align with your estate plan. Regular updates are recommended to reflect changes in family dynamics or financial goals.

Learning about these common questions can help you make smart choices for your child’s financial future.

Why Expert Guidance from a Florida Estate Planning Attorney Matters

Estate planning is complex, especially when minors are involved. Our experienced Florida estate planning attorneys can help you:

• Select the right trust structure
• Ensure your plan complies with state and federal laws
• Minimize legal and tax complications
• Protect your child’s financial future

Without professional guidance, even small mistakes can lead to major issues. Working with an attorney ensures your plan is legally sound and aligns with your family’s goals.

A Florida estate planning attorney can also help you navigate legislative changes like the SECURE Act, which impacts how inherited retirement accounts are distributed. Understanding these nuances is crucial for optimizing your child’s financial future. Additionally, a knowledgeable attorney can assist in choosing a trustee, structuring trust distributions, and minimizing tax burdens. Proactive estate planning ensures your minor child’s inheritance is secure and used for their best interests.

Contact Us for a Free Consultation

At Battaglia, Ross, Dicus & McQuaid, P.A., we have decades of experience helping families protect their assets. Our Florida estate planning attorneys provide personalized solutions tailored to your unique situation.

For over 60 years, our firm has provided top-tier legal services in Florida. Our estate planning team is known for expertise, attention to detail, and client-focused service. We take pride in helping families create solid, legally sound plans that stand the test of time.

Whether you’re setting up a trust, choosing a guardian, or updating your beneficiary designations, we’re here to help. Contact us today for a free consultation and let us guide you in securing your child’s financial future.