You can list a minor child as the beneficiary of a life insurance policy, retirement account, or bank account, but naming a minor child as a beneficiary directly almost always backfires. A child cannot legally receive or control the money until reaching the age of majority, so the insurer or financial institution holds the funds until a court appoints someone to manage them. The fix is to name an intermediary — a custodial account or a trust — with an adult you choose in charge of the money for the child’s benefit.
Why Naming a Child Directly Creates a Problem
Insurers and banks will not write a check to a child. When a minor is the sole beneficiary, the death benefit sits with the company until a court appoints someone to receive it. The same thing happens with brokerage accounts, IRAs, and payable-on-death bank accounts. The money exists. Nobody has authority to spend it.
Someone then has to petition the court for guardianship or conservatorship of the child’s estate. The judge picks who manages the money, and the judge’s pick may not be yours. Every significant expense from the child’s funds needs court approval, and the guardian usually files detailed annual accountings. Filing fees for these petitions run from roughly $20 to over $400, and attorney’s fees and administrative costs on top of that can consume hundreds to thousands of dollars a year, all deducted from the child’s inheritance.
In many states the guardian also has to buy a surety bond, an insurance policy protecting the child’s assets against mismanagement. The premium is another recurring cost against the estate. A dozen states require the bond outright; elsewhere it is up to the judge.
At the age of majority — 18 in most states, 19 or 21 in a few — whatever is left goes to the child with no strings attached.
Your Will Does Not Override the Beneficiary Form
A common assumption in estate planning is that your will controls where everything goes. It does not. Assets with a beneficiary designation — life insurance, IRAs, 401(k)s, annuities, payable-on-death accounts — pass directly to whoever the form names, regardless of what the will says. If your will splits everything equally among three children but the life insurance form lists only one, that one child receives the entire death benefit.
This matters when you plan for a minor. Setting up a testamentary trust in your will is pointless if the beneficiary form on your policy still names your child directly. The proceeds follow the form. To route the money into a trust or custodial arrangement, you have to update the actual designation on each account and policy.
Custodial Accounts Under UTMA or UGMA
The simplest workaround is a custodial account under the Uniform Transfers to Minors Act (UTMA) or the Uniform Gifts to Minors Act (UGMA). Nearly every state has adopted a version of these laws. A custodian you choose holds and manages the assets for the child’s benefit and can spend money on education, healthcare, and general support without court permission.
You name the custodial arrangement on the beneficiary form instead of the child. The wording usually reads something like: “Jane Smith, as custodian for Alex Smith under the [State] Uniform Transfers to Minors Act.” You will need the child’s Social Security number to complete the designation.
The drawback: whatever remains in the account belongs to the child outright once they reach the termination age set by state law. That age varies widely, from 18 up to 25 in some states, with 21 being the most common default. A few states let the person funding the account choose an extended termination age up front. After that birthday, the money is the child’s to spend as they wish.
If you serve as custodian and die or become incapacitated before the child ages out, what happens next depends on state law. You can usually name a successor custodian in advance, and doing so is worth the two minutes it takes. Without a named successor, a child aged 14 or older may nominate one from among family members; if the child is younger, a court steps in — the exact situation the custodial account was meant to avoid.
Using a Trust Instead
A trust gives you much more control over how and when the child receives inherited assets. You can create a revocable living trust during your lifetime or write a testamentary trust into your will that comes into existence at death. Either way, the trust — not the child — is what you list on the beneficiary form.
You write the rules. A trust can stagger distributions, releasing a portion at 25 for education, another at 30, the remainder at 35. You can restrict distributions to specific purposes like tuition or a first home. A spendthrift clause keeps the child’s future creditors away from the assets and protects the inheritance in a bankruptcy or divorce. The trustee, not the child, controls the principal, so an impulsive young adult cannot empty the account overnight. These controls last as long as the trust document says they last, not until a fixed birthday.
The tradeoff is cost and complexity. Setting up a trust means attorney’s fees, and the trust may need its own tax ID and annual tax filings. For a smaller inheritance, that overhead can eat into the assets it was meant to protect. A custodial account is often the better fit when the amount is modest and you are comfortable with the child taking control at the termination age.
Retirement Accounts Have Their Own Rules
Leaving an IRA or 401(k) to a minor triggers a separate set of tax rules that can bite hard if you get them wrong. Under the SECURE Act, most non-spouse beneficiaries have to withdraw the entire inherited balance within 10 years of the account owner’s death. Minor children of the account owner are treated as “eligible designated beneficiaries” and get a temporary exception.1Internal Revenue Service. Retirement Topics – Beneficiary
While the child is still a minor, distributions can be stretched over the child’s own life expectancy, spreading the tax burden. That treatment expires. For inherited retirement accounts, the IRS defines the age of majority as 21, regardless of state law.2eCFR. 26 CFR 1.401(a)(9)-4 – Determination of the Designated Beneficiary When the child turns 21, the 10-year clock starts, and the balance must be gone by the end of the year the child turns 31.
Every dollar pulled out of a traditional IRA or 401(k) is taxable income for the year of the withdrawal. A child forced to drain a large inherited account in a compressed window could face a substantial tax bill, potentially at higher rates than a longer stretch would have produced. A trust drafted specifically for inherited retirement assets, sometimes called a “see-through” or “conduit” trust, can help manage the timing. This is the area where an estate planning attorney tends to pay for itself.
One important limit: the eligible designated beneficiary treatment applies only to the account owner’s own child. Grandchildren, nieces, nephews, and other minor relatives fall under the standard 10-year rule with no childhood carve-out.1Internal Revenue Service. Retirement Topics – Beneficiary
The Kiddie Tax on Investment Income
When a child inherits assets that throw off investment income — interest, dividends, capital gains, trust distributions — the IRS does not just tax it at the child’s low rate. The “kiddie tax” was written to stop parents from parking investment income in a child’s name to save on brackets.
For 2026, the first $1,350 of a child’s unearned income is covered by the standard deduction and owes no tax. The next $1,350 is taxed at the child’s rate. Anything above $2,700 is taxed at the parent’s marginal rate, which is usually much higher.3IRS. Rev. Proc. 2025-32 A brokerage account paying $10,000 a year in dividends to a child produces a tax bill largely calculated as if the parent earned that income.
A child with unearned income over $2,700 has to file their own return and attach Form 8615. A parent can instead elect to include the child’s investment income on the parent’s return using Form 8814, provided the child’s gross income falls between $1,350 and $13,500 and consists only of interest, ordinary dividends, and capital gain distributions.4IRS. 2025 Instructions for Form 8615 The kiddie tax applies to children under 18, and also to 18-year-olds and to full-time students aged 19 through 23 whose earned income does not exceed half their own support.
A trust can sometimes time distributions to soften the kiddie tax impact. A custodial account offers no such flexibility; income is attributed to the child as it accrues.
What This Does to College Financial Aid
How the inheritance is titled also shows up on the Free Application for Federal Student Aid. For the 2026–2027 award year, a dependent student’s assets — including UTMA and UGMA custodial accounts — are assessed at 20% when calculating the Student Aid Index. Every $10,000 in a custodial account reduces the aid formula’s expectation by $2,000 in available funds.5Federal Student Aid. 2026-27 Student Aid Index (SAI) and Pell Grant Eligibility Guide
Parent-owned assets get assessed at a maximum of roughly 5.64%. A $50,000 inheritance in a UTMA account reduces aid by about $10,000; the same amount in a parent-owned 529 plan reduces aid by around $2,820. Trust assets may be reported as student assets depending on the trust terms and who controls distributions, so the drafting of the trust matters here too.
Picking a Structure and Updating the Forms
The right structure depends on how much you are leaving, how young the child is, and how much control you want after you are gone.
- For small inheritances, roughly under $10,000 to $15,000, a custodial account is usually the practical choice. Setup is free or nearly so, no separate tax return is required, and the administrative load is light. The child taking control at 18 or 21 is a smaller risk when the amount is modest.
- For moderate to large inheritances, a trust makes more sense. The cost of drafting and maintaining it is justified by staggered distributions, spendthrift protection, and the ability to keep assets managed into the child’s 30s or beyond.
- For retirement accounts, naming a trust as beneficiary requires careful drafting to preserve the stretch treatment. A badly drafted trust accelerates the taxes. If an IRA or 401(k) is a large part of what you are leaving, work with an attorney.
Whichever structure you pick, the last step is the one that actually makes it work: update the beneficiary designation on every account and policy so the form points to the trust or custodial arrangement rather than to the child. Those forms are the legal instruction the financial institution follows. Review them after any birth, divorce, death of a custodian or trustee, or move to another state.