What Happens If My Minor Child Receives My IRA? (Episode # 298)

Well, good afternoon, Michiganders.

It is Tuesday, February 27, 2024. And of course, this is Tuesday with Tom, Michigan's only weekly internet show where we do answer your questions about estate planning and estate settlement in Michigan. And we don't send you a bill.

As always, I'm your host, Tom Doyle, estate planning attorney, lifelong Michigan resident, and ambassador for all things good in this great state of Michigan.

Welcome, welcome, welcome to today's program.

Well, last week's episode was our eighth anniversary episode.

Hard to believe that we've been on the air for eight years now, but we have. Last week's anniversary episode was the 297th episode.And in that episode, I replayed our original episode from February eight years ago.

What is an estate plan?

So it's as relevant today as it was then.

So if you have questions about what an estate plan is, I invite you to listen to last week's episode.

Today's program though, I'm going to shift gears a little bit.

Going to talk about IRAs, and we're going to talk about what happens if my minor child receives my IRA.

But please remember, what I'm about to discuss during the program is, as always, for educational purposes only. It is not intended to be legal advice. You need to work with your attorney and your financial advisor and your tax advisor to determine what is appropriate for you and your estate plan.

What happens if my minor child receives my IRA?

Well, frequently when we are working with clients, and today most clients have an IRA or 401K, they start looking at beneficiary designations on those assets. Sometimes they're going to look at making maybe adult children as their beneficiaries on their assets.They might be looking at what's called a trusted IRA sometimes, or maybe some sort of a retirement trust.

But what happens if you don't do any of that, and if a minor child is going to receive your IRA?

Well, first of all, why might that happen?

Well, first, it might happen if you don't have a beneficiary designated on your IRA or your 401K when you die.

Let's say that you set up an IRA and you never put beneficiaries on it.

Or what might be more likely, let's say that you create the IRA or you've got the 401K at work and you have your spouse as the primary beneficiary on the IRA, but you don't have any alternate beneficiaries on the IRA, and your spouse dies before you.

Well, if that happens, you now have an IRA or a 401K without beneficiary designations on it, that asset is now going to have to go through probate.

And basically in the state of Michigan, in many cases, again, there are some qualifications that might apply, but in many cases or most cases, if you don't have a spouse, but you do have minor children, your IRA or 401K is going to be distributed out to those minor children.

Another time that that might actually happen is let's say that you are intentionally considering putting your minor children as the beneficiary on your IRA. Maybe you're going to have, as many clients do, the spouse as the primary beneficiary. And now you're looking at, well, what happens if I make the minor children my beneficiaries on the IRA?

Well, the first thing to understand is that certainly isn't the worst thing that can necessarily happen by naming the minor children as the beneficiary. At least the IRA itself, or the 401k, is not going to have to now go through probate.

However, what is most likely going to be required, though, is a custodian of the 401k, or the custodian of the IRA, obviously is not going to hand the proceeds over from your IRA or 401k to the minor children. So they will insist that a conservator is appointed by the probate court.

A conservator is the person that the probate court basically gives the authority to receive a minor child's inheritance, to manage that inheritance for the minor child until they turn 18.

Thus, if you're going to make the minor children as a beneficiary, you want to make sure that you have an appropriate will in place, because it is the will that you will use to name both the guardian of the minor children, and that's who the minor children are going to live with, as well as who it is that is going to manage the assets that the minor child is going to receive for them.

So some people might look and say, hey, that's a disadvantage, if you will, because it basically means that the probate court is going to have to be involved in receiving the assets because a custodian is going to have to be appointed by the probate court.

However, if that happens, now what?

Well, because of the required minimum distribution rules that are in place for IRAs, the child's conservator, who's now going to manage the estate, and we are assuming, obviously, for purposes of discussion, that the children are under 18 in the state of Michigan, because that's the age of majority.

So what's going to happen in that case is the conservator is now going to receive the proceeds from the IRA or 401K, and they are going to have to comply with required minimum distribution rules until such time as the child gets to be 18.

So that's going to be something that you're going to be working with a custodian or the conservator is going to be working with a custodian of the IRA and the 401K to make sure that appropriate required minimum distributions are being made until the child turns 18.

Well, what happens when the child turns 18?

Well, one of the changes that occurred recently because of the changes to the Secure Act or as a result of the Secure Act, federal legislation that controls a lot of issues concerning retirement funds. But before, it used to be we could look and say, well, the child could take out the benefits over their life expectancy.

Well, we now have, because of the recent change due to the Secure Act, 10 years, normally after your death, in order for the money to be taken out. But because we're talking about minor children and assuming that the minor children qualifies as an eligible designated beneficiary under the statute, they will then have an additional 10 years after they turn 18 in order to receive those proceeds.

So in Michigan, because the age of majority is 18, they would have until they turn 28 before they have to take all of the proceeds out of that IRA or 401k, or have it as an inherited IRA, if you will, they have to take all the proceeds out.

So it is possible that between the conservator who's going to manage the assets until the minor child gets to be 18, and at age 18, those assets being rolled into an appropriate IRA that can be managed now by the child until they get to be 28 in the state of Michigan, there still is the ability, if you will, to stretch out some of the benefits under that IRA or 401K.

Now, a downside, obviously, is that when the child gets to be 18, they might decide, I don't want to stretch it out, I want to take all the proceeds now rather than taking it out annually over the next 10 years.
So there is certainly some risk that the child, if the child decides to take the money now once they turn 18, it is, in fact, not going to be held and managed for them.

But those are all things that you need to think about when you're looking at the beneficiary designations on your IRA.

Some clients are going to look and say, hey, I don't want to go through getting a trusted IRA set up. I don't want to go through the cost of having a IRA trust set up.

There might be some other even more complicated estate planning structures that might include some life insurance that's used to replace money that's paid for taxes.

There's some people out there even talking about charitable remainder trust as a tool for creating an estate plan to manage assets, provide benefits for minor children, even beyond, in this case, age 28.

So there's a number of more complicated estate planning options that might be available to you, but if you're going to go with the simple option, which says make the children the beneficiary, understand that a conservator will have to be appointed for them. The conservator is going to have to make, take required minimum distributions until the child gets to be 18. At 18, though, they can extend until, at least in the state of Michigan, 28, the age at which they would ultimately have to have taken all of the proceeds out of that IRA.

So in answer to your question, what happens is conservator gets appointed, conservator receives the proceeds, conservator has to comply with required minimum distribution. When the child gets to be 18, the child can make the decision, do I want to take all the money now, or I've got 10 years, I can extend that over up to 10 years to take the proceeds out of that IRA or 401K.

Of course, if you have questions about your particular IRA or 401k, you should consult with the custodian of the IRA and 401k to see what options they have available for you if you want to make minor children as the beneficiaries, or maybe they have options available to you, such as a trustee IRA, if you want to have somebody else receive those proceeds.

And of course, Amanda and I would be honored to have the opportunity to help you by putting together your estate plan or amending a current plan or assisting you in settling in an estate.

But when it comes down to whether or not you should be making the children the beneficiary or not, that's really something that needs to be decided by you in conjunction with the custodian and your tax advisor.

Now, if you'd like to meet with Amanda or myself, want to put together your estate plan or amend a state plan or assist you in settling in a state, please visit our website, doylelawpc.com.

There you're going to find information on how to schedule a virtual consultation via Zoom or telephone or an in-person consultation at the East Lansing office.

Also, reminder, if all you're looking for is one document, maybe you're trying to sell real estate, it's owned by a trust, and you need a new certificate of trust. Or maybe you're looking and saying, hey, I need an updated power of attorney for healthcare. Please visit the legal store that again you're going to find at doylelawpc.com where you can now order individual documents that can be prepared and delivered to you via the internet for execution.

Well, I think that is going to be it for today's program.

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Thanks again for spending some of your time with us today.

And as always, I hope you have an awesome day and an awesome week in Michigan.

Stay safe now.

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