Because we write a lot of life insurance for families with young children, this question comes up frequently. As you have purchased life insurance to protect your family’s financial future, it is important to ensure that your minor children are properly covered financially in the event of your death.
If you die when children are minors, and you haven’t made any arrangements, as outlined below, there’s a good chance your kids won’t receive their portion of your policy’s death benefit. This is because:
So, how do you ensure that your minor children will benefit from the proceeds of your life insurance policy in the event of your death? You need to arrange legal means for the proceeds of the policy to be managed and supervised by a competent adult because, if you don’t, the court will appoint a property guardian for the children. That process will run up attorneys’ fees, court proceedings, and court supervision of life insurance benefits — costs and hassles that definitely won’t help your children. There are several ways to prevent this:
There are several key differences between leaving life insurance benefits to your children under the UTMA and through a child’s trust:
In most states, a UTMA custodian must turn the proceeds over to the child at an age specified by law — 18 or 21 in most states, up to 25 in just a few. In contrast, with a child’s trust, you can specify any age at which your child receives the proceeds.
A trustee for a child’s trust must file yearly income tax returns for the trust. A UTMA custodian need not file tax returns, although the minor must file a yearly return reporting money actually received.
Trust income tax rates are higher than individual tax rates. Annual income above a certain amount in a child’s trust is taxed at the higher trust tax rates. In contrast, all of the property subject to the UTMA is taxed at the child’s individual tax rate.
Because the UTMA is built into state law, financial institutions know about it and are comfortable with it. This should make it easy for the custodian to manage the insurance proceeds on behalf of the child.
Generally speaking, a UTMA custodianship is the most attractive option unless the amount of insurance is very large and the child will need a property manager past the age of 21. The UTMA custodianship is simpler to set up and manage — and often cheaper (from a tax standpoint) — than a child’s trust.
A UTMA custodianship is particularly sensible for proceeds below $100,000. Amounts of this size are often expended fairly rapidly for the child’s education and living needs and are simply not large enough to tie up beyond the age of 21. If larger amounts are involved, and you do not believe the child will be able to responsibly handle the money at the UTMA age limit, a child’s trust is a better bet.
Source: Should I Name Minors as Policy Beneficiaries, New York Life
Source: Using Life Insurance to Provide for Your Children, Nolo Press
When assets are directly bequeathed to an underage beneficiary, whether it’s through shared ownership of property or a payable-on-death (POD) account, the minor, due to their legal status, doesn’t possess the legal right to manage these assets.
As a matter of legal principle, minors aren’t permitted to hold property until they reach the age of majority in their jurisdiction. In circumstances such as these, a custodian is required to manage the minor’s financial matters.
Typically, this custodian would be a parent or guardian, but it could also be a reliable family member or a professional with experience in handling such affairs.
Minor beneficiaries cannot directly receive an inheritance, whether it’s distributed through a last will and testament, an intestate estate (where the deceased didn’t leave a will), or when a living trust was inadequately drafted.
In such situations, the executor of the estate cannot execute those provisions. State law then takes over, dictating the valuation and distribution of the deceased’s assets.
Most often, the estate is inherited by the closest relatives, with more distant relatives only receiving the property if the deceased had no spouse or children.
The process in which a minor beneficiary is expected to inherit from an estate varies from state to state, and it also depends on the value of the deceased’s bequest.
Yes, a minor can indeed be named as a beneficiary. However, due to their age and legal status, they cannot directly take control or manage inherited assets. Depending on the jurisdiction and nature of the assets, a custodian, trustee, or guardian may be appointed to manage the assets on behalf of the minor until they reach the age of majority.
No, a beneficiary does not necessarily have to be 18. A person of any age, including a minor, can be named as a beneficiary. However, because minors are legally unable to manage their own financial affairs, an adult custodian, guardian, or trustee may need to be appointed to handle the assets until the minor reaches the age of majority, which is often 18 but can vary depending on the jurisdiction.
Leaving a life insurance policy to a minor child requires some careful planning since children are not legally allowed to take direct control of the assets until they reach the age of majority. Here’s how you can do it:
If a minor is named as a direct beneficiary with no provisions made for their minority status (no trust, custodial account, or guardian specified), the court will typically appoint a guardian to manage the assets until the minor reaches the age of majority.
For more information about designating minors as beneficiaries and to get a free and confidential quote, call the insurance professionals at LifeInsure.com at (866) 868-0099 during normal business hours or contact us through our website
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