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Becoming a minor millionaire at 18 can create havoc
Imagine yourself on your 18th birthday — and you have just been handed millions of dollars. What would the 18-year-old version of you have done with all of that money?
If you were anything like the 18-year-old version of me, your plans likely would not have included investing the money, putting it toward college, giving it to charity, or even just plain old putting it in a savings account.
My plans would have looked something like this: a trip to Cancun with my friends for spring break, a hot new Mustang, many flat-screen TVs, and all of the video games money could buy.
Your spending list may look different as to the particulars, but the idea is probably captured above.
Many people would agree that an 18-year-old is not ready to handle that kind of money. Not only might they spend it irresponsibly, but it might remove the incentive to be a hard-working member of society. And many teenagers I know need no incentive to be lazy.
This situation is precisely what causes many parents with substantial assets to create trusts for their children. Trusts are legal instruments through which people can control the disbursement of money after their death.
So, for example, parents could create a trust that would provide for the living expenses of their children until the age of 25 and then give control of the sum to the child. This method can help parents provide for their children while encouraging them to be healthy adults.
Even for parents without the assets to necessitate such a system, you can probably see why this might be a good idea. Imagine your teenagers with more money than they’ve ever thought about. Scary, right?
But unfortunately, even for parents who take precautions to make sure their children are not given a fortune on their 18th birthday, this result can still occur in Michigan. This is because of wrongful death awards.
Generally speaking, a wrongful death award is the money your surviving family is given if you are killed by someone else, typically in an accident.
The theory behind wrongful death law is that your spouse and/or children are deprived of whatever future financial support you would have provided, plus the loss of your companionship. Accordingly, the responsible party must compensate your family.
A problem can arise, however, if both parents die in the same incident, such as a car accident. With no parents left behind, money awarded to the children is entirely their property.
Michigan law provides a way to handle a wrongful death award for children under 18. The money can be placed with a court-appointed person to manage it for the minor's benefit. But Michigan law does not state clearly what happens when the child reaches 18.
There is no law giving Michigan judges authority to create a trust to manage the funds beyond the age of 18 unless they suffer from some disability. There is also no law stating that the judges cannot create such a trust.
The lack of clarity has led some judges to decide that they have authority to create trusts that extend beyond the age of 18. Other judges think they do not have such authority.
This split among judges need not occur. Some states explicitly allow creation of a trust that extends beyond the age of 18 following a wrongful death award. For example, Ohio allows a judge to create a trust holding the award until the minor reaches age 25. This way, the child is provided for out of trust distributions, but is not asked to handle a large amount of money until a more mature age.
Ohio law aside — and since no express authority exists for Michigan judges — what can be done?
The first step would be an estate plan that includes a will. The responsible thing to do as a parent is to make sure that in the unfortunate event that you pass away, your assets provide for your children. In particular, you should lay out a careful plan of how you want that done, which should probably include a trust extending beyond your child’s 18th birthday.
A trust is a great way to provide for children while keeping a lump sum of money away from them until they are ready.
Even if you think, "Giving my 18-year-old a large lump of cash will never be an issue," you can still take precautions. Leave statements in your will as to your wishes in the event that your children receive a wrongful death award. That way, a judge who claims authority to create such a trust will know what you want for your children.
Finally, you could contact your local state representative. The way to truly make sure your wishes are carried out if your child receives a wrongful death award is to make the laws clear so that judges know they have authority to create a trust.
I realize that this is not a pleasant topic, but neither is the thought of the 18-year-old version of me wreaking havoc with a cool $5 million in my pocket.
Benjamin Anderson, who attends Notre Dame Law School, will soon join the law firm of Varnum LLP.