Avoid Major Headaches When Naming Minors as Beneficiaries
Naming children as beneficiaries or contingent beneficiaries of an insurance policy, retirement account or payable-on-death account seems a natural way to provide for those you love. But special care must be taken to ensure that, should the children inherit as minors, the money provides for them in the way you intend.
Because minors cannot legally hold substantial assets in their own names, complications arise when they inherit large sums. The way the inheritance is handled in such cases depends on the type of account and the amount of the inheritance, but one of the most common solutions is the court appointment of a guardian to administer the inheritance for the minor. Unfortunately, in such cases problems may arise that work to the disadvantage of the child you are hoping to take care of.
- Appointing a guardian may take months, delaying the time when the money becomes available for the minor’s support.
- Court costs and attorneys’ fees will diminish the amount of the inheritance.
- The appointed guardian may not be the person you would have chosen and the court’s choice may cause tension and quarrels within your family.
- The guardian must get court approval for financial transactions and submit to annual accounting, which can make accessing the money cumbersome, time-consuming and expensive. Plus, the court’s decisions may result in the funds not being made available to your child as you would have wished.
- At age 18 or 21, depending on state law, the child will gain full control over the inheritance regardless of their maturity and financial good sense.
Finding a Best Practices Solution
One of the most effective ways to ensure that a minor gets the most benefit from an inheritance is to create a trust for the child and name the trust as the beneficiary of your life insurance policy, retirement account and the like. With a trust you can:
- Avoid probate so that the money becomes available to the child with less delay.
- Have a trustee of your choosing manage the assets for the minor. The trustee does not have to be the child’s legal guardian, or even a relative. And you can change your trustee selection at any time if circumstances change.
- Choose to have the child gain control of the assets when they are older than the age of majority and may be more likely to have the good judgment necessary to handle the inheritance responsibly.
Keep in mind that tax considerations, family circumstances and creditor protection also play a role in choosing the best estate planning tools for you and your loved ones. To learn more about trusts or which estate planning tools are best for your situation, talk to your Client Advisor today.