A life insurance company generally does not pay out a death benefit directly to minors; instead, they are held by a court-appointed custodian until they reach 18 or 21 (depending on state laws). This process can be costly and time-consuming, and it could be better for the beneficiaries of these funds. It’s confirmed that you cannot name a minor as your beneficiary, but what happens when someone does this? Let’s learn more!
As a rule, it’s wise to avoid designating legal minors as beneficiaries on any account or investment vehicle—particularly retirement accounts like an IRA—since once they reach the age of majority (18 or 21 in some states), they will be entitled to access all their inheritance funds.
To avoid this situation, it may be beneficial to put assets into trust to preserve them and secure them for the child until legal adulthood. A trustee is often appointed with this task and can control how funds are dispersed until adulthood.
If no trust is set up, the only other alternative would be for the probate court to appoint a legal guardian of the estate and take control over the money and properties in question—an expensive and time-consuming process that should be avoided as far as possible.
Different trust structures incur different tax liabilities, so it is wise to consult professional advice to create the appropriate plan for your unique circumstances.
Custodial accounts are one of the easiest and safest ways to give minor children cash or securities. They can even be used as investment vehicles, such as stocks, mutual funds and ETFs, real estate properties, and even a life insurance policy—though be wary, as these accounts could incur tax and financial aid implications, so always consult a legal or financial advisor before opening one!
Once an account holder reaches 18, they’ll have complete control of it and can invest and spend it as they see fit, even if that goes against what was initially intended by their original custodian. Most financial institutions will only permit custodians to take risks with someone else’s funds if they guarantee they can do so safely.
Assigning retirement or trust accounts to children can be tempting, but an adult child over 18 (or 21 in certain states) would be a better choice when selecting beneficiaries. Children must gain the experience or maturity to properly handle a large inheritance.
Minor beneficiaries have several simple options for funding their beneficiaries directly through a state trust, such as the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). These accounts typically hold life insurance proceeds, Tax-Free Savings Accounts (TFSAs), Registered Retirement Savings Plans (RRSPs), or “beneficiary-designatable assets” (BDAs).
This approach usually provides the beneficiary with maximum control and allows you to appoint a trustee of your choice who will manage assets until your child reaches an age threshold. This saves both you and the primary beneficiary the cost and hassle associated with probate proceedings.
The trustee can use the money on behalf of the beneficiary until their specified age or return it to the estate if the beneficiary dies before reaching that age. This method of disbursing inheritance funds effectively prevents children from spending them irresponsibly or irreparably harming themselves and protects them from creditors.
Before setting up a UGMA or UTMA account for minors, it is advisable to seek professional legal or tax advice regarding its tax implications. Furthermore, various options for structuring trusts may exist; therefore, this consideration must also be given due diligence.
Under this type of trust arrangement, a trustee manages your child’s funds until he or she reaches maturity enough to take control. They may designate funds specifically for educational expenses or vehicle purchases or set up an account that offers your minor child a monthly allowance.
A trustee can be anyone from family or friends to professionals; either will do, as long as they always act in your child’s best interests and adhere to any terms set out in a trust document you create for them.
Suppose you are planning to name a minor as your minor beneficiary. In that case, it is wise to consult with a financial advisor or lawyer to ensure your estate plan addresses all aspects of their needs and wants.
Naming a minor as a beneficiary of a life insurance policy or any financial asset requires careful planning to ensure the child’s inheritance is managed responsibly until they reach the age of majority. By planning and consulting with financial and legal experts, you can secure your child’s economic future and ensure that their inheritance is protected and used wisely.
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Here are some questions that our readers have asked us.
If the heir is a minor, a legal guardian or trustee is appointed to manage the inheritance until the heir reaches the age of majority. This guardian oversees the assets and makes decisions in the minor’s best interest, ensuring the inheritance is preserved and properly utilized.
Children can be named beneficiaries in wills, trusts, and insurance policies. However, because minors cannot legally manage their finances, a guardian or trustee is usually designated to oversee the assets until the children reach the age of majority.
