Why this matters

Children often inherit before they’re legally or emotionally ready to manage money. Without planning, an 18-year-old can gain unrestricted access to sizeable assets and may make decisions that jeopardize long-term financial security. Properly using trusts and guardianship (or custodial accounts) helps preserve the inheritance for education, housing, medical needs, and future stability.

Key options to protect a minor’s inheritance

  • Trusts: A legal entity holding assets for a beneficiary and managed by a trustee according to written terms.
  • Custodial accounts (UGMA/UTMA): State-law accounts that transfer legal ownership to a minor at the designated age.
  • Guardianship/conservatorship: Court-appointed management when an estate is left directly to a child without a trust or when a guardian must administer assets during minority.
  • Special-needs trusts: Protect public benefits when a beneficiary has disabilities.

All of the above choices carry tradeoffs in control, court oversight, tax treatment, and flexibility. In my practice advising families over 15 years, I’ve seen better outcomes when planning starts early and documents are coordinated (trust + pour-over will + guardian nominations).

How trusts work for minors

Trusts are the most flexible and commonly recommended vehicle for preserving inheritances for children because you can:

  • Specify who serves as trustee and name backups.
  • Define ages or milestones when distributions occur.
  • Limit spending (education-only, healthcare, housing, first home).
  • Protect assets from the child’s creditors, divorce settlements, or poor money choices.

Common trust types used for minors

  • Revocable living trust: Flexible while the grantor is alive; becomes irrevocable at death. Useful when you want to control distribution timing but still change terms during life.
  • Testamentary trust: Created by a will and only goes into effect at death; often used when the grantor prefers on-death supervision.
  • Irrevocable life insurance trust (ILIT): Holds life insurance proceeds outside the taxable estate and can provide controlled distributions for a minor.
  • Standalone irrevocable trust: Useful for asset protection and tax planning, though less flexible because terms generally can’t be changed.

Practical trustee choices and governance
Selecting the right trustee is crucial. Options include a trusted family member, a trusted friend with financial competence, a professional fiduciary, or a corporate trustee. Consider:

  • Financial skill and integrity.
  • Willingness and availability to serve for many years.
  • Fee structure (family member vs. bank trust fees).

Many families adopt guardrails: co-trustees, trust protector roles, or an advisory committee to reduce the odds of mismanagement while keeping costs lower than a bank trustee.

Custodial accounts vs. trusts

UGMA/UTMA custodial accounts are simple and low-cost. However, they transfer legal ownership to the minor at the state-designated age (often 18 or 21), which may be too early for many families. Custodial accounts do not offer ongoing restrictions beyond that point and provide limited asset-protection features. Use custodial accounts for modest gifts or when simplicity is primary.

Guardianship and conservatorship: when courts step in

When a child inherits directly (for example, named as a beneficiary on an insurance policy without a trust), a court may appoint a guardian or conservator to manage the funds until the child reaches majority. Guardianship involves court supervision, filings, and reporting. That oversight adds cost and public record exposure that many families prefer to avoid.

Alternatives to a full court guardianship include:

  • Naming a custodial beneficiary under state law (UGMA/UTMA).
  • Establishing a trust to sidestep court involvement.
  • Using payable-on-death or transfer-on-death designations that feed a trust or custodial account.

For more about court supervision and alternatives, see our guide on Guardianship Planning for Minor Children.

Funding the plan: why “set it and forget it” fails

A common mistake is creating a trust but not funding it. If you name a trust in your plan but never transfer accounts, life insurance, or real property into it, assets may still pass outright or require probate/guardianship. A funding checklist should include:

  • Retitling brokerage and bank accounts to the trust where appropriate.
  • Naming the trust as the primary beneficiary for retirement plans only when recommended by counsel (be careful: retirement accounts have special tax rules).
  • Listing the trust as beneficiary of life insurance or placing proceeds into an ILIT.
  • Updating deeds for real property transfers to a trust where advisable.

Our Trust Funding Roadmap walks through the typical funding steps.

Tax and legal considerations (current as of 2025)

  • Income tax: Trusts that earn income generally file Form 1041 and may pay income tax at compressed rates unless income is distributed to beneficiaries (see IRS, About Form 1041: https://www.irs.gov/forms-pubs/about-form-1041).
  • Estate and gift taxes: Trust design and beneficiary selection can affect federal and state estate or gift tax exposure. State estate tax rules vary; consult an estate attorney for state-specific thresholds.
  • Retirement accounts: Naming a trust as retirement-plan beneficiary has complex tax consequences and should be done only with specialized drafting.

Citing official guidance helps avoid surprises: read IRS resources on fiduciary income tax and trust reporting (IRS Form 1041 guidance) and CFPB materials on guardianship descriptions and costs (Consumer Financial Protection Bureau, consumerfinance.gov).

Special situations

  • Special-needs beneficiaries: Use a properly drafted special-needs (supplemental needs) trust to preserve access to public benefits like Medicaid and SSI. Coordinate with a qualified attorney to avoid disqualification of benefits.
  • Blended families: Specify who receives assets and under what terms; consider staggered distributions to protect stepchildren and biological children fairly.
  • Financial immaturity or addiction history: Use restricted distributions, professional fiduciaries, and spendthrift provisions.

Sample distribution structures families use

  • Age-based phases: 25% at 25, 25% at 30, remainder at 35 (example only).
  • Purpose-limited distributions: Education and health paid directly by trustee; housing down payment with co-signed mortgage requirement.
  • Incentive trusts: Conditional payments tied to employment, education, or sobriety programs — tread carefully and use clear, enforceable language.

Common mistakes and how to avoid them

  • Forgetting to fund the trust: Use a funding checklist and confirm after major financial account changes.
  • Overly vague language: Be specific about when and why funds are distributed.
  • Choosing the wrong trustee: Test willingness to serve; name backups and consider professional co-trustees.
  • Ignoring taxes and benefits coordination: Coordinate trusts with benefit-eligible dependents and retirement-plan rules.

Practical checklist for protecting a minor’s inheritance

  1. Decide whether a trust, custodial account, or both are appropriate.
  2. Choose and document trustee(s) and backups.
  3. Draft clear distribution standards (ages, milestones, and permitted uses).
  4. Fund the trust and update beneficiary designations.
  5. Coordinate with tax and estate counsel, especially for retirement plans and special-needs cases.
  6. Review the plan every 3–5 years or after major life events.

Real-world example

A client I advised put life insurance proceeds into an irrevocable life insurance trust (ILIT) that named a testamentary minor trust for their two children. The trustee was a family friend with financial experience; distributions were limited to education and support until age 24, with staged distributions thereafter. The result: the children had tuition covered and a gradual transition to financial independence without court involvement or a sudden lump-sum windfall at 18.

When to get professional help

If you’re dealing with complex assets (business interests, retirement plans, significant life insurance, or a beneficiary with disabilities), you should consult:

  • An estate planning attorney licensed in your state.
  • A CPA experienced with trusts and fiduciary tax returns.
  • A qualified financial planner for investment and cash-flow guidance.

This article is informational and does not constitute legal or tax advice. For personalized advice tailored to your family’s situation, consult a licensed attorney and tax professional.

Further reading and internal resources

Authoritative sources

Professional disclaimer: This article provides general information and examples based on professional experience. It is not legal, tax, or financial advice for your specific circumstances.