Leaving Assets to Grandchildren in South Carolina: Using Trusts and UTMA Accounts

As a grandparent, one of the most fulfilling goals is to provide a secure and prosperous future for your grandchildren. The thought of helping them pay for college, make a down payment on their first home, or start a business is a powerful motivator. This desire to leave a lasting financial legacy is a common thread that connects families across South Carolina. However, the path to turning this generous intention into a legal reality is filled with complexities that, if ignored, can lead to unintended consequences.

Simply naming a minor grandchild in your will can create significant legal hurdles, potentially leading to court supervision and high administrative costs that diminish the very gift you intended to provide.

Why Direct Inheritance is Problematic for Minors

It may seem counterintuitive, but leaving property or money directly to a minor is often a significant legal mistake. The core issue is that, under South Carolina law, individuals under the age of 18 are not legally permitted to own and manage significant assets in their own name. They lack the legal capacity to enter into contracts, manage investments, or sell property.

If a minor inherits assets directly without a proper legal structure in place, the following sequence of events is likely to occur:

Court Intervention: The probate court must step in to protect the minor’s inheritance.
Appointment of a Conservator: A judge will appoint an adult, known as a conservator (or guardian of the property), to manage the assets on the child’s behalf. This may or may not be the person you would have chosen.
Ongoing Court Supervision: The conservator is required to file annual accountings with the court, detailing every penny spent and earned. This process is public, time-consuming, and can be quite expensive, with legal and accounting fees being paid from the inheritance.
Forced Distribution at Age 18: Once the child reaches the age of majority, which is 18 in South Carolina, the court-supervised conservatorship ends. The child is then legally entitled to receive the entire inheritance as a lump sum, with no restrictions or guidance. Few would argue that an 18-year-old is prepared to responsibly manage a substantial amount of money.

This cumbersome and restrictive court process is easily avoidable with proactive estate planning that utilizes more effective legal instruments.

What is a South Carolina UTMA Account?

The South Carolina Uniform Transfers to Minors Act provides a straightforward and popular method for gifting or leaving assets to a minor without requiring a formal trust or court intervention. A UTMA account is a type of custodial account that an adult holds and manages for the benefit of a child.

Think of it as a legal container. Any asset placed inside this container—cash, stocks, bonds, or even real estate—is legally owned by the minor. However, the adult custodian is responsible for managing, investing, and distributing those assets for the child’s benefit until they reach a certain age. The person who creates the account and the custodian can be the same person or different individuals. The gift is irrevocable, meaning once an asset is transferred to the UTMA account, it cannot be taken back.

What are the Advantages of Using a UTMA Account?

For many grandparents, a UTMA account is an attractive option because of its inherent benefits, particularly when the value of the gift is modest.

Simplicity and Low Cost: UTMA accounts are remarkably easy and inexpensive to establish. They can often be set up directly at a bank or brokerage firm with minimal paperwork and without the need for a complex legal document.
Avoidance of Court Guardianship: This is a primary benefit. A UTMA account completely bypasses the need for a court-appointed conservator and the associated costs, delays, and public scrutiny.
Custodian Flexibility: The custodian has broad discretion to use the funds for the minor’s “use and benefit.” This can include paying for education, summer camps, medical expenses, or other costs associated with the child’s upbringing.
Asset Protection: The assets in the account are the legal property of the minor. Therefore, they are generally protected from the creditors of the custodian or the person who gifted the money.

What are the Disadvantages and Limitations of UTMA Accounts?

While simple and effective in some scenarios, UTMA accounts have significant limitations that can make them unsuitable for larger inheritances or for grandparents who desire more control.

Mandatory and Unrestricted Payout: This is the most substantial drawback. Under South Carolina law, the custodian must turn over all remaining assets in the account when the beneficiary reaches the age of 21. The 21-year-old receives the entire sum outright, with no conditions or oversight. This can be a recipe for financial disaster if the amount is large or the beneficiary is not financially mature.
One Beneficiary, One Custodian: Each UTMA account can only have one beneficiary and one custodian. If you have several grandchildren, you would need to create a separate account for each one, which can become administratively inconvenient.
Negative Impact on College Financial Aid: Because the assets in a UTMA account are owned by the child, they are weighed heavily in federal financial aid calculations. This can substantially reduce or eliminate a grandchild’s eligibility for need-based scholarships and loans.
No Lasting Control: You cannot place any restrictions on how the funds are used after your grandchild takes control at 21. The money could be spent on a sports car or a frivolous vacation just as easily as it could be on a house or education.
Inflexibility with Successor Custodians: If the named custodian dies or becomes incapacitated, a court proceeding may be necessary to appoint a new one, reintroducing the very complication a UTMA is meant to avoid.

How Trusts Provide a More Controlled and Flexible Solution

For grandparents seeking more protection, control, and customization, a trust is a far more powerful and versatile tool. A trust is a private legal agreement that allows you (the grantor) to transfer assets to a person or institution (the trustee) to manage for the benefit of your grandchild (the beneficiary).

If a UTMA account is like a simple savings account with a fixed withdrawal date, a trust is like a detailed financial plan with its own set of rules. It allows you, not a statute, to dictate the terms of your gift. You can define precisely when, how, and for what purposes the money can be used, providing guidance and protection for your grandchild long after you are gone.

What Types of Trusts are Commonly Used for Grandchildren?

Several types of trusts can be used to leave assets to grandchildren, each serving a different purpose.

Testamentary Trusts: This type of trust is created within the terms of your Last Will and Testament. It does not exist until after you pass away and your will is processed by the probate court. While it allows for control over distributions, it does not avoid the probate process.
Revocable Living Trusts: A revocable trust is created during your lifetime, and you can amend or revoke it at any time. You can transfer assets into the trust and manage them yourself as the trustee. Upon your death, a successor trustee you have named takes over. The trust can then instruct the trustee to hold a grandchild’s inheritance in a continuing sub-trust, managed according to your specific rules. A major benefit is that assets held in a revocable trust avoid probate entirely.
Irrevocable Trusts: An irrevocable trust is typically established during your lifetime and, as the name suggests, cannot be easily changed or undone. When you transfer assets into an irrevocable trust, they are removed from your taxable estate. These are often used for significant gifts and can be structured to provide substantial asset protection for the beneficiary. A “Minor’s Trust” is a common type of irrevocable trust designed specifically for this purpose.

What are the Key Benefits of Using a Trust for Grandchildren?

The advantages of using a trust are directly related to its flexibility and the level of control it offers.

Control Over Distributions: You can design the trust to distribute assets based on age or life milestones. For example, you might direct the trustee to distribute one-third of the assets at age 25, another third at age 30, and the final portion at age 35. You can also permit the trustee to make distributions for specific needs, such as education, health expenses, a business startup, or a down payment on a home.
Asset Protection: A properly drafted trust can include a “spendthrift provision.” This important clause protects the inheritance from a grandchild’s future potential creditors, lawsuits, or a divorcing spouse. The assets are held by the trust, not the beneficiary, making them difficult for outside parties to access.
Professional Management: You can appoint a professional trustee (like a bank or trust company) or a trusted family member to manage and invest the trust assets. This ensures the funds are managed prudently, especially if the inheritance is large or includes complex assets like a business or real estate.
Planning for Special Needs: If you have a grandchild with a disability, a Special Needs Trust is an indispensable tool. It allows you to provide for their needs and enhance their quality of life without disqualifying them from vital government benefits like Medicaid and Supplemental Security Income (SSI).
Consolidated Planning: You can create a single trust to benefit all of your grandchildren. This can be structured as a “pot trust,” where the trustee can distribute funds among the grandchildren based on their individual needs, or it can be divided into separate, equal shares for each grandchild within the same trust document.

What is the Generation-Skipping Transfer (GST) Tax?

For individuals with significant wealth, another layer of tax planning comes into play: the federal Generation-Skipping Transfer (GST) Tax. This tax is imposed on gifts and inheritances given to individuals who are two or more generations younger than the donor, such as grandchildren. Its purpose is to prevent families from avoiding a full generation of estate taxes.

However, the federal government provides a substantial lifetime exemption from the GST tax. In 2025, this exemption amount is quite high, meaning the vast majority of families will not be affected by this tax. For those whose estates may exceed the exemption, trusts are a vital tool for structuring gifts in a way that maximizes the use of this exemption and minimizes overall tax liability.

UTMA vs. Trust: How Do You Choose the Right Option?

Deciding between these two valuable tools requires a careful assessment of your goals and financial circumstances.

A UTMA account may be the right choice if:

The total gift or inheritance you plan to leave is a relatively modest sum.
Your primary goal is simplicity and avoiding the cost of setting up a trust.
You are comfortable with your grandchild receiving full and unrestricted access to the funds at age 21.
The potential negative impact on college financial aid is not a major concern.

A trust is likely the better choice if:

The inheritance will be a significant amount of money.
You want to delay distributions beyond age 21 or provide them in stages.
You wish to protect the assets from your grandchild’s potential poor judgment, creditors, or a future divorce.
You are providing for a grandchild with special needs.
Your estate is large enough that tax planning is a consideration.
You want to leave specific instructions for how the money should be used.

The Importance of Coordinating with the Grandchild’s Parents

Open communication with your grandchild’s parents is an important part of the planning process. They may already have financial plans in place for their child, such as a 529 college savings plan. Your gift can be structured to complement their efforts. For example, instead of a UTMA, you could contribute directly to the 529 plan, which generally has a more favorable impact on financial aid eligibility. Discussing your intentions ensures that your generosity is integrated seamlessly into the family’s broader financial strategy.

Building a Lasting Legacy with Confidence

Leaving a financial legacy for your grandchildren is an act of love. Choose the right legal tool, a UTMA account or a trust, to provide for them with security and peace of mind, ensuring your gift is an opportunity, not a burden. The complexities of estate planning require knowledgeable guidance. The DeBruin Law Firm is dedicated to helping families across Greenville and South Carolina create tailored legal strategies that reflect their values and protect their legacy for generations to come. If you are considering how to best provide for your grandchildren, we invite you to contact us at (864) 982-5930 or send a message online to schedule a consultation.