Financial Planning Techniques for the Orphaned Minor Child

When parents name a guardian(s) in the wills, they also usually make provisions for adequate financial care for the minor children. In the event that the children become orphaned, the parents will usually want to make certain that all or most of their probate and non-probate property can be transferred to their children. Some of the more common sources of non-probate property include life insurance proceeds, joint tenancy survivorship arrangements, and trust property.

Usually, large amounts of property will need to be turned over to a fiduciary, who is legally responsible for their financial care. The parent can choose among a financial guardianship, a trust, or a custodianship under the Uniform Acts.

Financial Guardianship: Also known as an estate guardian, the financial guardian is usually appointed by the court. The financial guardian must file a formal accounting with the court every one or two years, and obtain written permission to perform unusual transactions, such as selling real property. In selecting a financial guardian, expertise in financial management is the top criteria for this role.

Trust for the Minor Child: Instead of a financial guardian, parents may choose a trustee to manage the parent’s property for the minor child. The trust can be created while the parent’s are living, or through their will. Trusts have many advantages, including the fact that it is not subject to court supervision. The trust can be flexible; provisions can be included concerning whether to distribute property outright when the children reach the age of majority, or whether to retain it and distribute only the income. Trusts can have multiple beneficiaries, while a separate financial guardianship must be set up for each minor. Trusts can also include specific provisions relating to income distributions to different beneficiaries at different times, while financial guardianships do not have this feature.

Custodianship under the Uniform Acts: As an alternative, the parent may wish to leave property to a custodian to benefit the minor child. This is accomplished through either the Uniform Gifts to Minors Act, (UGMA), or Uniform Transfer to Minors Act (UTMA). These custodianships offer more privacy than financial guardianships, because they also are not subject to court supervision. The drawbacks to these arrangements include the fact that in most states, property held in either a UGMA or UTMA account must be turned over to the minor child once they reach age 21, and there are limitations on the types of property that can be transferred to or placed into these accounts.

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