When a beneficiary is a minor, the asset doesn’t go to the child the way it would to an adult. Banks, insurers, brokerages, and retirement plan administrators will not hand significant sums to someone under the age of majority, so the money sits frozen until a legal adult is in place to receive and manage it. If you’ve set up a trust or a custodial arrangement in advance, that adult is the person you chose. If you haven’t, a judge chooses for you, and the child’s inheritance pays for the delay.
Why the Money Doesn’t Just Go to the Child
In most states, anyone under 18 lacks the legal capacity to enter binding contracts, manage investment accounts, or take title to real property. Alabama and Nebraska set the threshold at 19. Mississippi sets it at 21. Until the child reaches the applicable age, someone else has to hold and manage the assets on their behalf.
This is true across the board. A brokerage will not retitle shares into a 12-year-old’s name. A title company will not record a deed to a 15-year-old without court involvement. A life insurance company will freeze the death benefit entirely until a legal guardian or custodian is established. So the practical question is never whether you can name a minor. It’s what structure you put in place so the money actually reaches them without a judge in the middle.
What Happens If You Don’t Plan Ahead
When a minor inherits and no trust or custodial account exists, a court has to open a guardianship or conservatorship of the estate before anyone can touch the funds. Someone, usually a family member, petitions the probate court to be appointed guardian of the minor’s estate. Filing fees range from nothing to several hundred dollars depending on the jurisdiction, and attorney fees to prepare the petition typically cost more. The court evaluates the petition, which may include a hearing, a background check, and notice to relatives who might object.
Once appointed, the guardian usually has to post a surety bond to protect the child’s assets. The bond is sized to the estate, and annual premiums typically run 0.5% to 1% of the bond amount. On a $200,000 inheritance, that’s $1,000 to $2,000 a year, paid from the child’s funds.
Then comes the ongoing supervision. Major decisions — selling real estate, changing investments, making large expenditures — often need advance court approval. Annual accountings must be filed detailing every dollar in and out. None of these costs would exist if a trust or custodial account had been set up in advance.
The worse part is often the loss of choice. The court appoints whoever qualifies and petitions, and that person may not be who you would have picked. Family disputes over the appointment can drag on for months while the inheritance sits frozen and attorneys bill against it.
Custodial Accounts Under UTMA and UGMA
For modest inheritances, the simplest fix is a custodial account under the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA). These state laws let an adult custodian hold and manage assets for a child without a formal trust. The custodian invests the money, spends it on the child’s needs, and turns the account over when the child reaches the state’s termination age.1HelpWithMyBank.gov. What Is a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) Account?
That termination age is the main limitation. In most states, the child gets unrestricted access at 18 or 21. A few states allow the donor to push it to 25 at the time of the gift, and one state allows extensions to 30. Once the child hits that age, the money is theirs outright, no matter how prepared they are to manage it. You can’t stagger distributions or attach conditions.
Transfers into a UTMA or UGMA account are also irrevocable. Once the money goes in, it belongs to the child. Neither the custodian nor the person who made the gift can take it back.1HelpWithMyBank.gov. What Is a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) Account?
Custodial accounts work well when simplicity matters more than control. For larger inheritances, a trust is almost always the better tool.
Trusts for Minor Beneficiaries
A trust gives you far more say in when and how a child receives inherited assets. Instead of one fixed termination age, you write the rules. One-third at 25, half the remainder at 30, the balance at 35 is a common structure. You can tie distributions to milestones like finishing college or holding a job, or give the trustee discretion to pay for health, education, and living expenses in the meantime.
Two kinds of trusts come up most often. A revocable living trust is created during your lifetime, can be changed any time before your death, and avoids probate entirely because assets titled in the trust pass directly to the trustee without court involvement. A testamentary trust is written into your will and doesn’t exist until after you die. Testamentary trusts have to clear probate before taking effect, but they’re simpler to set up initially because they’re just provisions in your will.
Trusts also offer protection a custodial account doesn’t. Assets held in a properly structured trust are generally shielded from the child’s future creditors, divorcing spouses, and lawsuits. If the child develops spending problems later, the trustee can tighten distributions rather than hand over a lump sum on a birthday.
The trade-off is cost. Drafting a trust runs anywhere from a few hundred to several thousand dollars in legal fees, and trustees are entitled to reasonable compensation, which under most state laws falls between 0.5% and 3% of trust assets annually. For an inheritance large enough that premature access would do real harm, the cost is easy to justify.
Life Insurance Payouts to a Minor
Life insurance is where the freeze bites hardest, because the payout happens at the worst possible moment: right after a parent dies. If the policy names a minor as the sole beneficiary with no trust or custodial arrangement attached, the insurer will not release the death benefit. The claim sits unpaid while the family scrambles to get a guardian or custodian appointed.
The delay routinely stretches for many months. During that time, the family may need the money for the child’s immediate expenses, and the insurer is legally unable to pay. If custody is contested, the insurer may file an interpleader action, essentially depositing the money with the court and letting a judge sort out who should manage it. Even after a guardian is approved, courts frequently require the funds to be placed in a restricted account with annual reporting and spending limits.
The fix is simple. Either name a trust as the beneficiary, with the trust document spelling out who manages the money and how, or name an adult custodian under your state’s UTMA with the minor as the beneficiary. Some policies let you add a custodian designation directly on the beneficiary form. Either way, the point is to give the insurance company a legal adult to pay on the day the claim is filed.
Inherited Retirement Accounts
Retirement accounts follow a different set of rules because federal tax law controls the distribution timeline. Under the SECURE Act, a minor child of the deceased account holder qualifies as an “eligible designated beneficiary,” which gives them a longer window to withdraw the money than most other heirs receive.2Internal Revenue Service. Retirement Topics – Beneficiary
One detail catches people out: only the account holder’s own child, biological or adopted, qualifies. A grandchild, niece, nephew, or any other minor is treated as a non-eligible beneficiary and must drain the entire account within 10 years of the account holder’s death, no matter how young they are. Grandparents naming grandchildren on IRAs often don’t realize this.
For a qualifying minor child, the timeline runs in two phases. While the child is under 21, they take required minimum distributions each year based on their life expectancy. At age 21, a 10-year clock starts, and the child must withdraw all remaining assets by December 31 of the year they turn 31.2Internal Revenue Service. Retirement Topics – Beneficiary
Note the age-21 line. For inherited IRA purposes, “minor child” runs to 21, not whatever your state’s age of majority happens to be. An 18-year-old in most states is legally an adult for property purposes but still a minor child for this specific federal rule.
Tax Exposure on Inherited Assets
Inherited money generates investment income, and the IRS has specific rules aimed at preventing families from shifting that income to children to use their lower tax rates.
The kiddie tax applies to a child under 18, or under 24 if a full-time student whose earned income doesn’t exceed half their support. If the child’s unearned income (interest, dividends, capital gains) exceeds a threshold set each year, the excess is taxed at the parent’s marginal rate rather than the child’s.3Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income A parent can sometimes elect to report the child’s income on their own return instead of filing a separate one for the child, if the income falls within the eligible range and consists only of interest and dividends.
Trusts face a different squeeze. If income stays inside the trust rather than being distributed to the child, the trust pays the tax, and trust brackets are dramatically compressed. For 2026, a trust reaches the top 37% federal rate at just $16,000 of taxable income.4IRS. 2026 Estimated Income Tax for Estates and Trusts (Form 1041-ES) An individual wouldn’t hit the same 37% rate until income exceeded $640,600.5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 That’s why many trusts are drafted to distribute income to the beneficiary each year rather than let it accumulate: once the income passes through, it’s taxed at the child’s individual rate (subject to the kiddie tax above), which is almost always lower.
529 Plans as a Supplement
A 529 college savings plan isn’t a substitute for a trust or custodial account, but it fits alongside them when education funding is part of the plan. The account owner, typically a parent or grandparent, keeps full control. The minor is the designated beneficiary but has no right to withdraw anything. Earnings grow tax-free, and distributions used for qualified education expenses — tuition, fees, books, room and board, and up to $10,000 per year of K-12 tuition — are tax-free at the federal level.6Internal Revenue Service. 529 Plans: Questions and Answers
Unlike a UTMA account, the child never automatically gets control. If the child doesn’t attend college, you can change the beneficiary to another family member with no tax consequence. Contributions count as completed gifts for gift tax purposes, so amounts over $19,000 per year per beneficiary may trigger gift tax reporting, though a special rule lets you front-load up to five years of gifts in a single year.7Office of the Law Revision Counsel. 26 USC 529 – Qualified Tuition Programs
Picking the Person Who Manages the Money
Whether you set up a custodial account or a trust, you’re choosing someone to manage money that isn’t theirs for a person who can’t yet speak up. Get this wrong and the legal structure around it doesn’t matter much.
A UTMA custodian has fairly limited duties: invest prudently, use the funds for the child’s benefit, and turn over the balance at the termination age. A trustee carries a heavier load. Trustees owe a duty of loyalty, meaning they must administer the trust solely in the beneficiary’s interests. They have to invest prudently, keep detailed records, file trust tax returns, and make distributions according to the trust’s terms. Breaching those duties can create personal liability.
Financial capability matters, but temperament matters more. The right person will push back on requests that aren’t in the child’s long-term interest, including requests from other family members. If no one in the family fits that description, a corporate trustee like a bank trust department is worth considering. Corporate trustees charge higher fees but don’t get sick, move away, play favorites, or die.
Always name at least one successor. If your chosen trustee can’t serve and there’s no backup, a court appoints someone, which costs money and may produce a result you wouldn’t have chosen. Co-trustees sound like a compromise, but disagreements between them can force the family back into court, and the legal fees come out of the child’s share.
Contingent Beneficiaries and Keeping Forms Current
Everything above assumes the child outlives the account holder. If the child dies first and no contingent beneficiary is named, the asset typically defaults to the account holder’s estate. It then goes through probate, becomes subject to the deceased’s creditors (including potential Medicaid recovery claims), and may be distributed to someone the account holder never intended. Naming a contingent beneficiary on every account takes a few minutes and prevents the whole scenario.
Review beneficiary designations every few years and after major life events like divorce, the birth of another child, or the death of a named beneficiary. Designations on financial accounts and insurance policies override whatever your will says, so an outdated form can undo even a carefully drafted estate plan.