Do you want to leave part of your estate to your grandchild or another young family member? If so, you should plan carefully.

Every state has a law that allows a parent or grandparent to make gifts to young beneficiaries. These laws are usually called Gift or Transfer to “Minors” Acts. They allow you to make a gift to a young person, while allowing the money to be managed by an older and more experienced “custodian.”

Custodial accounts can be set up with virtually any bank, broker or mutual fund and are easy to maintain. You can create them either during your lifetime, or in a Will or Trust document or beneficiary designation.

Many people put provisions in their Wills that state that any assets going to someone who is under age 21 will be held and invested by a custodian until the beneficiary reaches age 21. Without this provision, the minors would receive their inheritance at age 18.

Until 2003 in Pennsylvania, a “minor” (for purposes of custodial accounts) was a person under age 21. This meant that a custodian would have to turn over the funds to the minor when the minor reached age 21.

The problem is, many people are still financially immature on their 21st birthday. They may still be in school and have limited experience dealing with money. As a result, many parents and grandparents would prefer to protect the funds beyond age 21. Until the new law in 2003, they were forced to create more complicated and expensive trust arrangements.

Since the enactment of Act 50 of 2003, custodial accounts in Pennsylvania can be designed to continue to age 25. The individual who makes the transfer[i] specifies the age, up to 25, at which time the money is to be turned over to the young person. If no age is specified, then the funds must be given to the minor at age 21. See, 20 Pa.C.S.A. §5321.

What Should You Do?

– If you have already created a Will or Trust that specifies that gifts to “minors” will be managed by a custodian, you might want to update that provision. If you want the custodian to be permitted to continue to manage the account to age 25, your lawyer can make a simple change in your document to accomplish this.

– Recognize that your grandchildren or other “minors” may someday inherit from you as contingent beneficiaries. An inheritance you have designated to pass to one of your adult children may instead pass to young grandchildren in the event the primary beneficiary predeceases you.

– Inheritances can pass to younger persons because they are beneficiaries or contingent beneficiaries on IRAs, life insurance policies, annuities, and other assets that may pass outside of terms of your Will or Trust. You may need to specifically update the beneficiary designations on these assets.

– If your current Will or Trust documents create a trust to hold funds for minors until they reach age 25, you might want to consider changing them to use the less complicated custodial account arrangement.

 – If you intend to leave money to a minor and your planning documents do not allow for a custodial arrangement, be aware that the minor will receive his or her funds at age 18.  If you think that is too young to come into an inheritance, talk to your lawyer about updating your plan.