Leaving Life Insurance To Minors: Is It Possible?

Life insurance is a way to provide financial support to your loved ones after you pass away. It's common for parents to take out life insurance to provide for their minor children in case they die unexpectedly. However, insurance companies will not hand the payout directly to beneficiaries under the age of 18. In this case, a guardian will be appointed to manage the money and support the children until they turn 18. To avoid legal complications, you can set up a life insurance trust or name an adult caregiver as the beneficiary.

Naming a minor as a beneficiary

While it is possible to name a minor as a beneficiary of your life insurance, it is not recommended. In the event of your death, the minor would not be able to receive the life insurance benefit directly. A court-appointed custodian would be brought in to oversee the funds, delaying payments to your family.

If you want to leave your life insurance to a minor, it is best to set up a trust for them. This way, they will receive the benefit promptly and without having to pay taxes or legal fees. A trust is a legal entity that holds assets that are managed and distributed by a designated trustee. You can choose the trustee—a trusted relative, partner, friend, legal representative, or other adult—and set the terms for managing the funds on behalf of your child until they turn 18 or 21, depending on your state. The trustee will typically draw money out of the trust to support the minor or cover expenses like their education. Trusts can be written in different ways, some giving the trustee more discretion over how the fund should be administered and others specifying more exactly where the money should go. Usually, there will be a set date or occasion at which time your children will get access to the money in the trust, such as when they turn 18 or graduate from university.

Another benefit of writing a life insurance policy in trust is that the payout will typically not be considered part of your estate and therefore won't be subject to inheritance tax.

Legal implications of naming a minor

Leaving life insurance to a minor is a complex process with several legal implications. Here are some key points to consider:

When you purchase a life insurance policy, you can choose your minor child or children as beneficiaries who will receive the payout upon your death. However, there are legal implications to consider when naming a minor beneficiary. Insurance companies will not directly hand the payout to beneficiaries under the age of 18. This creates a need for alternative arrangements to ensure the proper management and distribution of the funds.

Options to Consider:

To navigate the legal complexities, you have a few options:

• Set up a life insurance trust: A life insurance trust is a legal entity that holds and manages the assets on behalf of the minor beneficiary. You can choose a trusted relative, partner, friend, or legal representative as the trustee. The trustee will administer the trust according to your wishes until the minor reaches the age of majority (typically 18 or 21, depending on the state). By setting up a trust, you can have more control over how the money is spent and when your children receive it.
• Name an adult caregiver: Instead of naming your minor child directly, you can name their adult caregiver, such as your spouse, partner, or another trusted adult, as the beneficiary. This gives them the flexibility to use the death benefit as they see fit to support your child. Once your children are adults, you can add them as primary or contingent beneficiaries without the legal implications of them being minors.
• Assign a custodian: You can assign a custodian or guardian for your minor child's estate. This person will manage and oversee the funds until the child reaches the legal age of majority. The custodian makes decisions in the best interests of the minor child and ensures the funds are used appropriately.

Additional Considerations:

It is important to keep in mind that the process and associated costs of probate court, which determines the distribution of assets, could hinder your intended use of the funds. To avoid this, setting up a trust or assigning a custodian can streamline the process and ensure your wishes are carried out efficiently. Additionally, by writing your life insurance policy in trust, the payout may not be subject to inheritance tax, resulting in more funds available for your child's benefit.

Alternatives to naming a minor

While it is possible to leave your life insurance benefit to a minor child, it is not recommended due to the legal implications involved. Here are some alternatives to directly naming a minor as your life insurance beneficiary:

Set up a life insurance trust

A life insurance trust is a legal entity that holds assets managed and distributed by a designated trustee. The trustee can be a trusted relative, partner, friend, legal representative, or another adult chosen by you. The trust, rather than the child, is listed as the beneficiary, and the trustee routes the money to the child per your wishes and guidelines. This option gives you more control over how the money is spent and when your child receives it. You can specify certain conditions, such as allocating funds for education, an allowance, or a specific occasion, such as graduating from university.

Designate a custodian

If setting up a trust is not feasible, you can name a custodian to help claim and manage the death benefit on behalf of the minor child. The custodian will have access to the funds for state-approved expenses, such as education, and will be responsible for managing the money until the child turns 18. It is important to choose a custodian you trust to act in the best interest of the child.

Name your spouse, adult child, or other adult next of kin as the beneficiary

If it aligns with your family dynamics, you can name your spouse, adult child, or another adult relative as the primary beneficiary. This option allows the beneficiary to continue managing household finances and setting money aside for the minor child's future.

Name your spouse as the primary beneficiary and the trust as the contingent beneficiary

In this scenario, the spouse can manage the finances and set aside money for the child's future as the primary beneficiary. If both parents pass away, the trust can take over as the contingent or secondary beneficiary. This option ensures that the minor child receives the intended financial support promptly and without legal complications.

Insurance companies' policies on minors

Many parents take out life insurance to provide for their children in the event of their unexpected passing, and it is very common for children under 18 to be named as beneficiaries of life insurance policies. However, insurance companies will not hand the payout directly to beneficiaries under 18. Instead, a guardian will be appointed to manage the money and support the children with it until they turn 18.

To avoid the legal implications of naming a minor as your beneficiary, you could instead name your spouse, partner, or other potential caregivers. If something happens to you, they can use the death benefit as they see fit. Once your children are adults, you can add them as primary or contingent beneficiaries without the legal implications of naming a minor beneficiary.

One way to provide for a minor child with your life insurance benefit is to place it in a trust managed by a custodian of your choice. This custodian will typically be a trusted relative, partner, friend, legal representative, or other adult. You can also leave a signed statement naming guardians for your minor children, which will be honoured. Including these arrangements in a will, however, makes it easier to carry out your wishes.

Another option is to designate your death benefit for uses that benefit your minor child. Speaking with legal and financial advisors can help you determine the best choice for your family.

How to leave life insurance to a minor

Yes, you can leave life insurance to a minor, but there are some extra steps involved in the process. Here's a guide on how to leave life insurance to a minor:

Naming a Minor as a Beneficiary

When purchasing a life insurance policy, you will be asked to name the beneficiaries who will receive the payout upon your death. You can choose your minor child or children as beneficiaries. It is very common for parents to name their children as beneficiaries to provide financial support for their children if they pass away unexpectedly. Single parents might name their children as primary beneficiaries, while coupled parents often name each other as primary beneficiaries and their children as contingent beneficiaries.

Legal Implications

There are some legal implications to consider when naming a minor beneficiary. Insurance companies cannot directly give life insurance payouts to minor children. A guardian or custodian will be appointed to manage the money and support the minor until they turn 18 or 21, depending on the state. This can cause delays in payments to your family as a court-appointed custodian takes control of the funds.

Options for Leaving Life Insurance to a Minor

To avoid legal complications, there are a few options to consider:

• Naming an adult beneficiary: Until your children are adults, you can name your spouse, partner, or other potential caregivers as the beneficiary. This enables the caregiver to use the death benefit as they see fit to support your children. Once your children are adults, you can add them as primary or contingent beneficiaries without legal implications.
• Setting up a life insurance trust: Another option is to set up a life insurance trust, which is a legal entity that holds and manages assets on behalf of the beneficiary. You can choose a trusted relative, partner, friend, or legal representative to act as the trustee and manage the funds according to your wishes until the minor turns 18 or 21. The trust, rather than the minor, is listed as the beneficiary, streamlining the payout process. This option also gives you more control over how the money is spent and can help avoid inheritance tax.
• Designating specific uses for the death benefit: You may also be able to designate your death benefit for specific uses that will benefit your minor child, such as education or other expenses.

Seeking Professional Advice

It is important to speak with legal and financial advisors to determine the best choice for your family when considering leaving life insurance to a minor. They can guide you through the process and ensure that your wishes are carried out smoothly and efficiently.

Frequently asked questions