Leaving Property to Children
This is a transcript of a podcast posted on October 8, 2007.
 This is the second of two interviews with attorney Liza Hanks, the author of The Busy Family’s Guide to Estate Planning, from Nolo. In this interview, Liza answers questions about family assets and leaving money to children.
Rich Stim: Liza, I think one common misconception that a lot of people have is that all of the assets in the family are controlled by the will, and that’s not always the case, is it? Can you give us some examples of assets that do not pass through a family’s will?
Liza Hanks: Sure, some of the biggest assets that many families have don’t pass by will. Life insurance is a big one -- life insurance goes to whoever you’ve named as the beneficiary of the policy. Retirement accounts are another big one -- again, they will pass to whoever you’ve mentioned as the beneficiary of those retirement plans.
Real estate can pass to people by the way in which it’s owned, and not by the will or the trust that you’ve established, and certain bank and brokerage accounts can be designated to go to certain people by payable-on-death or transfer-on-death registrations. Sometimes I work with families and everything they have can be taken care of outside of the estate plan, leaving the estate plan to cover things like jewelry, woodworking tools, and just items of personal property.
Rich Stim: In the book, you talk about two ways that people commonly manage the money left for children: a trust, or a custodial account. Can you give us a quick explanation of the difference?
Liza Hanks: Sure. A trust is the most flexible way to leave money behind for kids. Using a trust -- usually drafted by an attorney, or using one of Nolo’s products -- you can specify exactly what age you want a child to invest and match money on their own, and how the money can be used during the time it’s in the trust, and also who’s going to be managing and investing the money on behalf of the kids while the trust exists.
A custodial account is like a generic, state law version of a trust that everybody can use for free. Everybody knows what a custodial account is, if you go to a bank or a brokerage account to open one. In terms of the fact that everyone knows what it is, it’s a little bit more limited -- a child has to own the money when they turn twenty-one, or at the very latest, twenty-five, if you set it up to only happen upon your death. In either case, the money will altogether be there, at the very latest, by the time they’re twenty-five. In a trust, you can tie up the money for longer, and you can put more restrictions on its use.
Rich Stim: You also talk about a property guardian… what is a property guardian? What will that do for your children?
Liza Hanks: Well, not much... it’s definitely a third choice in terms of managing money for children until they become legal adults. We talked earlier about custodial guardians, that’s the person a judge appoints to raise a child until they turn eighteen. A property guardian is a similar appointment by a judge to manage a child’s property until they turn eighteen.
The downside to that is that a child would inherit everything at eighteen, which is even younger than twenty-one or twenty-five, and also, during the time that they’re serving as property guardian, they’re under the supervision of the court, so they have to provide at least, usually, annual accountings of how the money is invested and spent.
Rich Stim: What if you want your child to get the money from your retirement account? Do you advise that people name their child as a beneficiary?
Liza Hanks: I don’t generally encourage my clients to name minor children as beneficiaries. First, they should always name their spouses, because spouses get special tax deferment rights that other people don’t get when they inherit a retirement account, and if you name a child directly as the beneficiary of an account, you’re going to run into the problem we just discussed, which is that minor children can’t own property worth more than a few thousand dollars.
So, if you name a child directly as the beneficiary of a retirement account, a property guardian is going to have to be appointed to manage that account on their behalf, until they’re eighteen. So, what I tell my clients to do is to either use a custodial account or a trust to manage a retirement account on behalf of a minor child.
Rich Stim: Can you tell us the difference between a P.O.D. and a T.O.D. account?
Liza Hanks: Both of these kinds of accounts are ways that you can leave either a bank or savings account, or a brokerage or securities account, to somebody upon your death, and a payable-on-death (POD) account generally applies to savings accounts and cash accounts, whereas transfer-on-death (TOD) accounts refer to security accounts and brokerage accounts. They both basically do the same thing; if you want to leave your checking account at the bank to your adult child upon your death, you can fill out a simple form at the bank, you can avoid probate, and you can transfer the account immediately upon your death to those people.
Rich Stim: How much of this information do you share with your children? I’m sure it relates to their ages, but are there any guidelines or any ideas about what to tell people about this?
Liza Hanks: Well, I tell my clients that they don’t have to tell their children anything. They’re under no obligation to tell anyone about their estate planning; it’s entirely confidential and personal information, and it’s likely to change during their lifetime, so I don’t want someone to lean over at Thanksgiving and say, “You know what, you’re no longer the guardian of our kids. We had a horrible trip to the beach last weekend, and we’ve changed everything, and written you out of our plan.” I mean, that would just be dumb.
I tell people that it’s totally up to them; if they feel like they want to share this information with their kids, they absolutely can, and if they feel like it would be better to keep it confidential until it’s needed, then that’s an option they have as well.
Rich Stim: And, without violating any of your client confidences, can you tell us any examples from your own practice that demonstrate creative ways that parents may have used estate planning to protect children?
Liza Hanks: Certainly one area that people use estate planning to protect their children has to do with kids who maybe aren’t so good with managing money, and using the estate planning process as a way to structure an inheritance, so that it won’t be detrimental to someone’s development. I’ve had clients do things like ask trustees to purchase annuities for children, so they never inherit a bulk amount of money, but they get a yearly or a monthly stream of revenue that would be useful for them. I’ve had parents set up trusts in such a way that the money can only be used for a restricted purpose.
Sometimes I think that estate planning is really useful for parents, because they use it as a way to just start conversations within their family that they probably needed to have anyway -- about guardianship, about their expectations for children growing up, about the values they have that are important to them that their children carry on… so, sometimes it’s the documents themselves, sometimes it’s the process of making them.
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