Minor (underage) inheritance

[Shughart]

I am hoping someone has been through this and can offer some insight.

Both of my children have inherited from their great grandmother and we've gotten some paper work giving us several options. We were hoping to take the lump sum and start 529 plans for both of them. The paperwork came addressed to them C/O custodian.

Now when we fill out the forms, and send them in, they will be sending a check. It also notes that they will be sending the IRS a 1099-R. Will the tax forms be in the kid's names? Or ours as custodians? Will the checks come in the kid's names? Can they even sign and deposit checks?

Would we then have to file taxes for the kid's next tax season, or would we file their forms on our return? Could there be additional federal tax liability (I know they could be subject to state income tax). I am wondering if it would be smarter to deposit the checks into savings accounts in their names, wait out the tax season, to see if anything additional is owed off of it, and then open 529 plans for them.

I know this is a lot and I should consult a professional. You guys are just my first stop. My next stops will be my husband, and his CPA LOL. But you guys are more easily accessible and I AM OVERWHELMED

 

[afan]

I am hoping someone has been through this and can offer some insight.

Both of my children have inherited from their great grandmother and we've gotten some paper work giving us several options. We were hoping to take the lump sum and start 529 plans for both of them. The paperwork came addressed to them C/O custodian.

Now when we fill out the forms, and send them in, they will be sending a check. It also notes that they will be sending the IRS a 1099-R. Will the tax forms be in the kid's names? Or ours as custodians? Will the checks come in the kid's names? Can they even sign and deposit checks?

Would we then have to file taxes for the kid's next tax season, or would we file their forms on our return? Could there be additional federal tax liability (I know they could be subject to state income tax). I am wondering if it would be smarter to deposit the checks into savings accounts in their names, wait out the tax season, to see if anything additional is owed off of it, and then open 529 plans for them.

I know this is a lot and I should consult a professional. You guys are just my first stop. My next stops will be my husband, and his CPA LOL. But you guys are more easily accessible and I AM OVERWHELMED

I'd go straight to the CPA and have them help with it. I'd also talk with the CPA and others about whether the 529 is best. While education is expensive and important, what if they don't want to go to school or they get a scholarship or decide they'd rather use it for a house. I'm not familiar enough with 529's to know if you can use them for things other than education. I would just look at all avenue's of what to do with the money.

I'm also guessing if it's nothing the 1099 that they'll have to pay taxes because it's over what the threshold is but I'd also want to make sure that it has to come out of the inheritance and that it isn't coming out of the estate or something already.

 

[runwad]

This article may help you https://www.thebalance.com/what-happens-to-the-inheritance-of-a-minor-beneficiary-3505140

I've always learned minors can't inherit, someone else would have to oversee it until they reached majority.

Looks like you could open a 529 with you as the owner and them as the beneficiary (that is how you want to do it anyway so for financial aid purposes its gets assessed at the lesser parent rate, than the child's).

That's all I know. I'm sure others more knowledgeable will be along soon

 

[BridgetBordeaux]

The source of the funds influences how the money is handled under the tax code. Whether it came from a retirement account, or just from assets from the estate, will impact tax liability on recipient. I would also guess that the lawyer that handled the paperwork can quickly tell you what the tax ramifications are.
Yes..........consult a professional.

 

[QueenIsabella]

I would go the UTMA route, versus the 529 route, personally. A 529 can only be used for education, while the child could one day use the UTMA for anything. For better or worse, of course, but it's their money (or one day will be). YOu can also invest an UTMA in anything, but there are frequently limits on what a 529 can be invested in.

FTR, all of my kids have trusts. Some were set up by their grandmother through the years, then the kids inherited life insurance proceeds when their grandmother died a couple years ago. We use these accounts for two things right now--one, to talk to our kids about investing for the long term; and two, to talk about the family legacy, this final gift from their grandmother, how it's to be used for a good purpose, not squandered. We also talk about how we (parents) have a duty to two people--them, and their grandmother--to invest the money wisely.

Beyond that, yes, please talk to a tax professional.

 

[Shughart]

I did a quick google search of UTMA, is there any way to stipulate an older age? I know legally it is their money, but I liked the idea of an education stipulation if it was being used at an early age. I think we can all agree we don't make the best decisions (financial or otherwise) at 18/21 and I would hate to see my kids mess up a good opportunity their GG gave them. We also do not have ANY money put away their education. So this would light a fire under us. I think I have a lot to discuss with my husband. As well as considering the other options they gave us. I will definitely have him make us an appointment with his CPA. Thank you so much for all the perspective and advice!

 

[QueenIsabella]

My kids UTMAs were done in NY, which meant the age was 21. We lived in NY at the time, but MIL lived in NH--she set everything up. You might be able to pick the state to get 21 versus 18.

I understand what you're saying about young adults and money. This is why we started, fairly early on, discussing the legacy aspect with them. They all totally get it. Just so you know, my kids range in age from 13-23. Obviously, I can't stop DD23 from cashing out her accounts and buying 20,000 pounds of Swedish Fish, or some other, equally stupid purchase. But, she understands that the money is a final gift from her grandmother. She got a portion of the life insurance (trust stipulated 25% upon college graduation, balance at age 30). She put 2/3 into a Roth IRA, and will use the balance for travel. This is reasonable to me, and in keeping with her grandmother's life philosophy.

Our DS21 has some issues, including impulse control. Luckily, he recognizes this, and has asked us to help protect him from himself. He and I are sitting down with our financial planner next week--he's willing to sign paperwork saying he can't make a withdrawal without Mom or Dad co-signing. We hope to one day be able to lift this, but that day is pretty far away.

My younger two have no access at this time. We just keep repeating the "legacy" speech. Our youngest is interested in the stock market--as it happens, MIL was an active trader until the day she died, so we talk about which stocks she owned (which we now own). We talk about what we might sell, and the one stock we won't. We talk about family values, about being entrusted with Grandma's money--how we adults are responsible to use it in a fitting manner (education and travel). We don't bring this up every day of the week, but when we have cause to--say, the kids see a shiny object they wish we owned. We point out that, if we bought every shiny object, we couldn't pay for their college.

I don't know if any of that helps you, but it seems to work on my kids.

 

[seashoreCM]

Another advantage (or importance) of consulting a professional is to avoid tax traps such as required minimum distributions or the kiddie tax.

As of 2018, "personal exemptions" were abolished. This made it more favorable to have more income in the child's name. You will need to size up whether the earned income credit would be even more favorable.

When a child receives income, s/he has a separate tax return.

 

[cvjw]

My kids have been given yearly gifts from their grandparents since they were born. We opened UTMA’s for them at a very young age. There is no tax consequences for the child for the gift - as long as it is under the IRS’s threshold for gifts. My kids have had to file their own tax forms since an early age since their money produces money (capital gains, dividends, distributions). We also have to file the kiddie tax, since their income is significant. The kiddie tax is a PITA.

When my boys reach the age of 21, the UTMA is dissolved, and the account becomes theirs alone. We used the account for their education expenses, and then the remainder will be left in the stock market to grow for their retirement. Both know about the money, and know to leave it alone.

For the 1099, my husband inherited from his aunt’s retirement account a few years ago and was issued a 1099. We had to report it on our taxes and it was considered taxable income. This may be the case for your daughter also.

 

[holden]

Can’t answer your tax questions, but we set up trusts for our kids. Their inheritance goes directly into the trust. They are allowed money for healthcare, education, housing and food until the age of 30. At 30 they get a certain percentage and then the rest at 35.

 

[tvguy]

I would expect the check to come exactly how the paperwork came.

 

[SharonZ]

You should really consult a tax professional.

 

[Shughart]

My kids UTMAs were done in NY, which meant the age was 21. We lived in NY at the time, but MIL lived in NH--she set everything up. You might be able to pick the state to get 21 versus 18.

I understand what you're saying about young adults and money. This is why we started, fairly early on, discussing the legacy aspect with them. They all totally get it. Just so you know, my kids range in age from 13-23. Obviously, I can't stop DD23 from cashing out her accounts and buying 20,000 pounds of Swedish Fish, or some other, equally stupid purchase. But, she understands that the money is a final gift from her grandmother. She got a portion of the life insurance (trust stipulated 25% upon college graduation, balance at age 30). She put 2/3 into a Roth IRA, and will use the balance for travel. This is reasonable to me, and in keeping with her grandmother's life philosophy.

Our DS21 has some issues, including impulse control. Luckily, he recognizes this, and has asked us to help protect him from himself. He and I are sitting down with our financial planner next week--he's willing to sign paperwork saying he can't make a withdrawal without Mom or Dad co-signing. We hope to one day be able to lift this, but that day is pretty far away.

My younger two have no access at this time. We just keep repeating the "legacy" speech. Our youngest is interested in the stock market--as it happens, MIL was an active trader until the day she died, so we talk about which stocks she owned (which we now own). We talk about what we might sell, and the one stock we won't. We talk about family values, about being entrusted with Grandma's money--how we adults are responsible to use it in a fitting manner (education and travel). We don't bring this up every day of the week, but when we have cause to--say, the kids see a shiny object they wish we owned. We point out that, if we bought every shiny object, we couldn't pay for their college.

I don't know if any of that helps you, but it seems to work on my kids.

This was very helpful thank you. We are in an awkward position of our kids being the only great grand children in the life insurance policy. I want to teach them about the money and how to be true to her legacy, but with tact and discretion. My son (adhd, also with some impulse control issues) has a bit of a loud mouth at 9 years old. You mentioned your youngest is 13. Do you have any good resources for smart money moves/teaching kids about money for ages 10-12? Thank you again!

Thanks to everyone else who had advice and guidance as well! I talked it over with my husband last night and we have a game plan in place and he is going to call and make an appt with his people. Unfortunately due to his current schedule we can't get in until mid April, but it looks like as long as we execute one of these options before the end of the first year after her passing we are OK (that gives us through the end of this calendar year).

And this is for all the people who told me to consult a professional, which I already stated I would be doing

 

[tvguy]

The only issue with UTMAs is when the child becomes an adult, you need a "Medallion Signature Guarantee" to change ownership, put in a change of address, or sell it. My son has some World Wrestling Stock and I have been trying to get my name, and the UTMA off of it for years (my son is now 31) and I have been trying to find someone willing to do a "Medallion Signature Guarantee" and so far, no luck. I understand why, This is basically a step above a Notarized Document in that the person verifying your ID is ALSO promising that if something goes wrong, THEY will reimburse any loss. In my case it is $86, but many firms will not even guarantee that little of a transaction.


https://www.lynalden.com/medallion-signature-guarantee/

 

[AJollyHoliday]

You mentioned your youngest is 13. Do you have any good resources for smart money moves/teaching kids about money for ages 10-12?

My DD inherited an annuity from my GF (her GGF). He put her as the beneficiary when she was little and we discussed with him. He didn't want the money to be in her 529 because he wanted her to have options. For the record, with a 529 if your child gets a scholarship, you can pull out that amount without penalty. So if they get $1000 scholarship, you can withdraw $1000 from the 529 without a penalty.

The check for our DD came with her name and I believe DH's name (it was from my GF, but he put my DH on it I believe). Anyway, we took the check to the bank and deposited it in an account with my DD. We then opened up a Vanguard fund for her and have invested it, but we talk with her regularly about it. We listen to Dave Ramsey a lot and she has heard a lot as well. She picks up a lot of the money stuff and heard someone call in saying when they were 20 they invested in mutual funds and then 20 years later they had a lot of money. This made her really interested. DH and I read Smart Money, Smart Kids and that gave us age appropriate things to talk to our DD about (she is 12). Dave Ramsey has a kid series as well so you can look into that.

 

[Anthony1971]

529's.... I never did one for a few reason... First being if your child does not go to college the money is still theirs and you will have no control over what age the money is given. However being the money is in your name you will than pay the taxes on the income. My accounts have in trust for...in case of anything. Second depending on your state as some have better ones than others and some states will even contribute X amount if certain criteria is met BUT there is also a fee charged yearly as it is nothing more than a mutual fund and some in the 2% range meaning you can make out better putting the money in CD's in many cases but again you pay the taxes unless you open a custodial account but with that you again have no control over the money.... Do your research and ask questions of who ever is advising you as everyone has a go to plan of what they believe in and that may not be right for you. some may also advise you on a product where they gain the most commission if you were using a Financial advisor... What ever you do research all options and understand each one before you speak with anyone of what to do... My point being everyone has the best intentions with children I do as well but children make mistakes growing up ranging from poor driving habits to bad choices of friends to drugs to going to college for a year and deciding that is not right for him/her and more, as hard is it is to see a child go through any of these it is harder when the child starts making the right decisions and has wasted a large amount of money that could have been used for the right decisions. I have seen parents go through this before and even one that took out a second mortgage to pay for college and after 2 years the child was done with school. I decided my best was to suck it up and pay the few dollars a year in taxes as you just never know....and all of these children were great at different ages they simply made mistakes...on the good side the large majority of people I know who had 529's or custodial accounts the money was used exactly what it was intended for...

 

[Shughart]

My DD inherited an annuity from my GF (her GGF). He put her as the beneficiary when she was little and we discussed with him. He didn't want the money to be in her 529 because he wanted her to have options. For the record, with a 529 if your child gets a scholarship, you can pull out that amount without penalty. So if they get $1000 scholarship, you can withdraw $1000 from the 529 without a penalty.

The check for our DD came with her name and I believe DH's name (it was from my GF, but he put my DH on it I believe). Anyway, we took the check to the bank and deposited it in an account with my DD. We then opened up a Vanguard fund for her and have invested it, but we talk with her regularly about it. We listen to Dave Ramsey a lot and she has heard a lot as well. She picks up a lot of the money stuff and heard someone call in saying when they were 20 they invested in mutual funds and then 20 years later they had a lot of money. This made her really interested. DH and I read Smart Money, Smart Kids and that gave us age appropriate things to talk to our DD about (she is 12). Dave Ramsey has a kid series as well so you can look into that.

I am taking it as a sign that I was able to snap that book up on eBay for $3.72 with a coupon code! We dabble in DR. It's a bit extreme, but I do like a lot of the principles. I think it will help give us a good framework to start with the kids, thank you!

 

[laceltris3]

.

 

[cvjw]

The only issue with UTMAs is when the child becomes an adult, you need a "Medallion Signature Guarantee" to change ownership, put in a change of address, or sell it. My son has some World Wrestling Stock and I have been trying to get my name, and the UTMA off of it for years (my son is now 31) and I have been trying to find someone willing to do a "Medallion Signature Guarantee" and so far, no luck. I understand why, This is basically a step above a Notarized Document in that the person verifying your ID is ALSO promising that if something goes wrong, THEY will reimburse any loss. In my case it is $86, but many firms will not even guarantee that little of a transaction.


https://www.lynalden.com/medallion-signature-guarantee/

We easily got my 23 year old son’s UTMA account changed to just his name when he turned 21. Our financial advisor did all the paperwork. All we had to do was come into the office and have him sign his name.

 

[QueenIsabella]

We're having no issues transferring over DS21's UTMA to him. As I said, since he has impulse control issues, it's a little more complicated--he has to sign a paper allowing DH and I to have the control he knows he needs. Transferring stuff to DD23 didn't require any kind of special signature or anything other than a signed paper or two. This may well vary by state.

I don't have any book recommendations, aside from what you've already been given. We've just gone with general discussions. Keep in mind, though--MIL died in 2017, our youngest was 11 at the time. He was old and aware enough to see DH and I going through the various crap involved with settling an estate. And we've freely talked to the kids about the specifics.

I'm also not a big fan of 529s--too many restrictions on how you use the money and how it can be invested. However, it might be a good choice for the OP--just know that, you can pick the state, and some states are better than others in regards to fees, investment choices, etc.