How to Leave Your Life Insurance to Your Minor Children
Many parents turn to life insurance to take care of their family in the event of death. While it is true that life insurance is a particularly helpful financial tool to protect your loved ones, it is just as important to consider how to leave the proceeds to your minor children. You should also take into account how to incorporate your retirement money (IRAs and 401(k)s), another common, significant asset into your overall estate plan.
After you purchase life insurance you will name a beneficiary of the death benefits. You also name a beneficiary on your retirement accounts. But, if you name your children as beneficiaries and your children are minors at the time they inherit these assets, the court will appoint a conservator, the person to “watch over” a minor person’s money. This process will require attorneys’ fees, court proceedings, supervision from the court, and will generally limit investment options – all costs and delays that will not help your children, but rather cost them a significant percentage of their inheritance.
What’s even worse? The money will be handed over to the child when they turn 18, at which time they can spend it however they wish! This can open up a ready opportunity for irresponsible spending that most parents would never intend.
Benefits of a Trust for Children
It's very common to see parents list a minor child as the primary or contingent beneficiary on life insurance policies. This may work, as long as everyone dies in the “right” order and at the “right” time. But, it’s a gamble, and providing structure through a trust for these inheritances is a vastly better option. Unlike custodial accounts, where the proceeds must be handed over once a minor turns a certain age, you can specify at which age or ages your child receives or gets control of the proceeds. This allows you to specifically designate how the money is to be used, so it will be available for the important life events, while protecting your children from reckless spending. Ultimately you have more control with a trust.
The Beneficiary Form is Very Important !
Many parents' estate plans do create a trust for their children when the parents pass. However, it's also very common to see the minor children still listed as beneficiaries on the beneficiary form - THIS IS INCORRECT! In this situation, the proceeds will not flow into the trust but rather go outright to the minor children, causing the problems mentioned above.
So, instead of naming minor children as beneficiaries, the child’s trust should be named as the beneficiary on the beneficiary form so that the money will be managed and used properly for the benefit of your children. This lets you designate someone you think will manage the money well, rather than leaving it to the whims of the court.
We Can Help!
If you have any questions about how to leave assets to your minor children - whether it is a life insurance policy, a retirement account, or any other asset - contact Hamrick Law today!