Leaving Life Insurance To Minors: Is It Possible?

Life insurance is a way to ensure that your loved ones are financially secure even after you're gone. When you purchase a life insurance policy, you can choose your child or children as beneficiaries who will receive the payout. However, leaving life insurance to a minor can be tricky due to legal implications. In this article, we will explore the options available to ensure that your minor children can access the life insurance death benefit without any issues. We will also discuss the role of an estate planning lawyer in helping you navigate this complex process.

Naming a guardian for a minor beneficiary

Yes, you can leave your life insurance to a minor. However, there are some legal implications when doing so. To avoid these, you can name an adult guardian who will receive the payment on behalf of the child. This person will then oversee the funds until the child reaches adulthood and can access the money.

• Money management skills: Ensure that the guardian you choose is an experienced money manager.
• Trust: It is crucial that you trust the guardian to act in your child's best interests and honour your wishes regarding the use of the death benefit.
• Personal guardian vs property guardian: Consider whether you need to appoint a personal guardian (someone to care for the child) and a property guardian (someone to manage the child's finances and assets). If you choose both, the property guardian should be listed as the custodian.
• Legal implications: Be aware of the legal implications of naming a minor as a beneficiary. In some states, a court may appoint a guardian for the minor's estate, and there is no guarantee that the assets will be handled according to your wishes. There may also be fees and delays associated with the court process.
• UTMA account: Consider setting up a Uniform Transfers to Minors Act (UTMA) account, which allows you to appoint a custodian to manage the child's assets until they reach adulthood.
• Living trust: Another option is to create a revocable or irrevocable living trust and name the trust as the beneficiary of the life insurance policy. This gives you more control over how the funds are distributed and avoids the probate process.

Setting up a UTMA account

To set up a UTMA account, you will need to open a special custodial account at a life insurance company, bank, or financial institution. The money deposited into this account will be controlled by a custodian—someone you appoint to manage the assets for your minor child—until your child reaches the age of majority, typically between 18 and 21 years old. The custodian is responsible for managing the assets in the best interest of the minor until the custodianship ends, at which point the account and any remaining funds will be transferred to the child, who will then have full control over the account.

It is important to note that the custodian and the guardian do not have to be the same person. The guardian is the person who will physically care for your child in your absence, whereas the custodian is responsible for managing their money. While you can select your child's guardian in your will, if you want that person to also be the financial custodian, you must name them again in the UTMA account.

One advantage of using a UTMA account is that the money contributed is exempt from paying a gift tax of up to a maximum of $18,000 per year for 2024 and $19,000 per year for 2025. However, a drawback is that it may impact the child's eligibility for need-based college scholarship programs and other financial aid.

Creating a life insurance trust

Benefits of a Life Insurance Trust

The main advantage of setting up a life insurance trust is that it allows you to control how and when your children receive the death benefit from your life insurance policy. This can help ensure that the money is used according to your wishes and can provide a safety net for your children's future. Additionally, a life insurance trust can help your children receive the benefit faster by avoiding the probate process, where the court oversees the distribution of assets.

Another benefit of a life insurance trust is that it can protect your children's eligibility for certain government programs, such as Supplemental Security Income government assistance payments. This is especially relevant if you have a child with a disability.

Furthermore, a life insurance trust can help shield your beneficiaries from estate taxes, which can preserve family wealth across generations.

Types of Life Insurance Trusts

There are two main types of life insurance trusts: revocable and irrevocable.

Revocable Life Insurance Trusts

A revocable life insurance trust, also known as a living trust, offers more flexibility as it can be changed or cancelled at any time. This type of trust is typically recommended for most people, as it gives you more control over your trust and life insurance policy while you are alive. However, it may be more confusing to set up and will likely cost more than simply naming your children as beneficiaries.

Irrevocable Life Insurance Trusts (ILITs)

An irrevocable life insurance trust is intended to be permanent and cannot be easily changed or cancelled once it is finalized. This type of trust is generally recommended for high net worth individuals as it can help minimize federal and state estate taxes. While it provides tax benefits, an ILIT does not allow for changes to beneficiaries, trustees, or terms of the trust once it is established.

Special Considerations

When creating a life insurance trust, it is important to consider the responsibilities of the trustee. The trustee is responsible for managing the trust's assets, including the distribution of the life insurance payout. Trustees have a fiduciary duty to act in the best interest of the trust's beneficiaries. It is common to name a close friend or family member as the trustee.

Additionally, it is worth noting that setting up a life insurance trust can be complex and may require the assistance of an estate planning attorney. There may also be associated costs, ranging from a few hundred to thousands of dollars, depending on the complexity of your finances and whether you choose to hire a lawyer.

In conclusion, a life insurance trust can be a valuable tool to ensure that your minor children are provided for in the event of your death. It offers flexibility, control, and peace of mind, knowing that your children's future is secure.

Naming an adult beneficiary to manage proceeds

When you purchase a life insurance policy, you can choose your child or children as beneficiaries who will receive the payout when you pass away. However, there are some legal implications when naming a minor beneficiary. To avoid these, you could name an adult beneficiary to manage the proceeds. This can be a spouse, partner, or other potential caregiver. This enables the person caring for your children to use the death benefit as they see fit.

One option is to establish a life insurance trust. This gives you more control as you can specify how you would like your death benefit to be distributed. For example, you may state that a portion of the funds are distributed for your child's education when they turn 18, and then at age 25, they receive the remaining amount.

Another option is to designate your partner or spouse as the primary beneficiary. They can continue to handle your household finances and save money for your child's future. If both parents pass away, the life insurance trust can kick in.

A third option is to create a UTMA (Uniform Transfers to Minors Act) account. This requires you to name a custodian to manage your child's assets until they become an adult. The assets will then be transferred to your adult child, who may use the funds as they choose.

Consulting an estate planning lawyer

• Understanding Legal Implications: An estate planning lawyer can explain the legal implications of naming a minor as a life insurance beneficiary. They can inform you about the restrictions on insurance companies paying out directly to minors and the potential need for court involvement.
• Exploring Options: Lawyers can outline various options for providing for your minor child through life insurance. They can guide you through setting up a life insurance trust, designating an adult guardian, or creating a UTMA account. Each option has its own advantages and complexities, and a lawyer can help you choose the most suitable approach for your family.
• Ensuring Efficient Distribution: By consulting an estate planning lawyer, you can ensure that your minor child receives their inheritance efficiently. Without proper planning, your child's access to the funds may be delayed, and the money may not be used as intended. A lawyer can help you establish clear instructions and safeguards to prevent this.
• Addressing Guardianship: If you appoint an adult guardian to manage the insurance proceeds for your minor child, a lawyer can provide guidance on selecting a suitable guardian. They can assist in drafting instructions and safeguards to ensure the guardian acts in your child's best interests and honours your wishes.
• Customizing Trust Funds: Setting up a trust fund for your minor child can provide peace of mind and ensure the money is secure until they reach adulthood. An estate planning lawyer can explain the different types of trusts, such as revocable trusts or irrevocable trusts, and help you choose the most appropriate option for your specific circumstances.
• Long-Term Planning: Consulting an estate planning lawyer allows you to make informed decisions that consider your child's long-term future. They can help you weigh the potential consequences of your child gaining unrestricted access to a large sum of money at the age of majority. Lawyers can also assist in drafting instructions for how the funds should be managed and distributed over time.
• State-Specific Considerations: Estate planning lawyers are well-versed in state-specific laws and regulations regarding minors and life insurance. They can advise you on the age of majority, probate processes, and any unique considerations in your state that may impact your planning.
• Avoiding Unnecessary Costs: Without proper planning, your minor child's inheritance may be subject to additional attorney's fees, court costs, and other expenses. An estate planning lawyer can help you structure the insurance proceeds in a way that minimizes these unnecessary costs, ensuring more funds are available for your child's benefit.
• Integrating with Overall Estate Plan: Consulting an estate planning lawyer allows you to integrate your life insurance decisions with your overall estate plan. They can advise you on how to align your life insurance beneficiaries with your will and other estate planning documents, reducing the potential for litigation and beneficiary disputes.
• Peace of Mind: By consulting an estate planning lawyer, you can gain peace of mind, knowing that you have made informed decisions about your minor child's future financial security. They can provide guidance and support throughout the process, ensuring that your wishes for your loved ones are honoured.

Frequently asked questions