Adding Minors To Life Insurance: Executors And You

Life insurance is a crucial financial product that provides peace of mind and security for individuals and their loved ones. When purchasing a life insurance policy, it is essential to carefully consider and designate beneficiaries and executors. This process ensures that the policy's death benefit is distributed according to the policyholder's wishes upon their passing. While beneficiaries are typically individuals such as a spouse or children, a minor child can also be named as a beneficiary, although this comes with certain legal implications and complexities. To mitigate these challenges, alternatives such as establishing a life insurance trust or creating a UTMA account can be explored. Additionally, understanding the role of an executor in the probate process is vital, as they are responsible for handling the estate's assets, including life insurance claims, and ensuring the proper distribution of funds to the designated beneficiaries.

A minor can be a life insurance beneficiary, but there are legal implications

If the parent decides to list their young children as beneficiaries, things can become more complicated because insurance companies cannot release the death benefit directly to children under the age of 18 or 21, depending on the state. Instead, additional steps need to be taken to protect the insured's wishes.

In cases where disputes arise, the life insurance policy will go through probate. The court will name a guardian to manage the child's estate until the minor reaches the age of majority. This can lead to several downsides, including a delay in financial support for the child, the appointment of a guardian who may not be the insured's choice, and the possibility that the estate assets will not be handled according to the insured's wishes. The probate process can also result in fees and reduce the funds available to the child when they reach adulthood.

To avoid these legal implications, there are a few alternative options to consider:

• Designate an Adult Guardian: You can make the child's adult guardian the policy beneficiary. The guardian will receive the payment on behalf of the child and oversee it until the child reaches adulthood. However, this option requires trusting the guardian to be an experienced money manager and act in the child's best interests.
• Set Up a UTMA Account: Under the Uniform Transfers to Minors Act (UTMA), you can open a special custodial account to hold the life insurance money until your children reach the age of majority. You can designate a trusted adult as the custodian to manage the assets until the child becomes an adult.
• Name a Living Trust as Beneficiary: You can create a revocable or family trust and name it as the beneficiary of the life insurance policy. This option offers more flexibility in deciding how and when your children will receive the money.
• Establish a Life Insurance Trust: By setting up a life insurance trust, you can specify how you want your death benefit to be distributed. For example, you can state that a portion of the funds be used for your child's college education, with the remaining amount distributed at a later age.
• Designate Your Spouse or Partner: Consider assigning your spouse or partner as the primary beneficiary, allowing them to continue managing finances and saving for your child's future.

By considering these alternatives, you can ensure that your minor children are provided for in the event of your accidental death while avoiding the legal complexities and potential delays associated with naming them directly as beneficiaries.

A court-appointed custodian may be needed to manage funds until the minor reaches adulthood

When a minor is the beneficiary of a life insurance payout, the probate court will appoint a guardian to manage the child's estate. This guardian, or custodian, will oversee the estate and its money until the child reaches the age of majority.

The custodian serves as the guardian of the money and assets intended for the minor child, allowing for valid transfers under the Uniform Transfers to Minors Act (UTMA). The custodian has a fiduciary duty to make decisions regarding the assets as long as the choices are in the best interests of the minor child. Once the child reaches the age of majority, the assets are turned over to them, and the custodian's role ends.

The process of appointing a court-appointed custodian can be time-consuming and costly, and there is no guarantee that the appointed guardian will be someone the insured would have chosen. Additionally, the probate process means that the life insurance money can be used to pay off debts, and the associated fees can significantly reduce the funds available to the child when they reach adulthood.

To avoid these potential issues, there are alternative options for ensuring a minor child can access a life insurance payout. One option is to designate an adult guardian, such as a spouse or partner, as the policy beneficiary. Another option is to set up a UTMA account, which allows parents to open a special custodial account at a financial institution to hold the money until the child reaches the age of majority. A third option is to name a living trust as the beneficiary, which offers more flexibility in deciding how and when the child will receive the funds.

A life insurance trust can be established to specify how the death benefit is distributed

A life insurance trust is a legal agreement that allows a third party to manage the death benefit from a life insurance policy. This ensures that the policy's death benefit is distributed to the beneficiaries according to the wishes of the deceased. It also exempts the funds from probate and may reduce any estate tax owed.

There are two types of life insurance trusts: irrevocable life insurance trusts (ILIT) and revocable life insurance trusts. ILITs are commonly used by high-net-worth individuals whose estates exceed the federal estate tax threshold. Once created, ILITs cannot be changed or cancelled, and the proceeds from the insurance policy are not subject to federal estate tax. Revocable life insurance trusts, on the other hand, can be modified or cancelled. They are useful for parents who want to control how their children spend their inheritance. For example, instead of giving a child a lump sum, the trust can disburse the funds in installments over time.

When setting up a life insurance trust, the trust itself typically owns the life insurance policy, while the grantor is the named insured. When the grantor passes away, the trust receives the policy's death benefit, and the trustee distributes the funds to the beneficiaries according to the rules set out in the trust agreement.

Life insurance trusts can be funded with various assets, including cash, stocks, bonds, and other investments. While they can be created with term or permanent life policies, permanent life insurance policies are more commonly used because they provide a guaranteed death benefit. Term life insurance policies may expire before the insured person dies, leaving the trust unfunded.

Life insurance trusts can be complex and costly to establish, and they may have significant tax implications. Therefore, it is essential to seek the advice of an experienced financial professional or estate planning attorney when considering this option.

A UTMA account can be created to appoint a custodian to manage the child's assets

When it comes to life insurance, ensuring your children's financial security is a primary concern for many. While children can be named as beneficiaries, receiving the payout can be complicated. If the parent dies before the child becomes a legal adult, the child will not be able to receive the benefit directly. In such cases, a court will appoint a guardian to manage the child's estate, but this can be a lengthy and costly process.

One way to ensure your child receives the payout without issues is to set up a UTMA (Uniform Transfers to Minors Act) account. This type of account allows you to appoint a custodian to manage your child's assets until they reach adulthood. The custodian has a fiduciary duty to manage and invest the property on behalf of the minor, and the assets are owned by the minor from the time they are gifted. The donor can be the custodian or they can appoint a third party, such as a trusted relative or friend.

The benefits of a UTMA account include tax advantages, as gifts are exempt from gift tax and any income earned is taxed at the minor's rate. Additionally, the account can hold various assets, including cash, securities, real estate, and intellectual property. However, one drawback is that it may impact the child's eligibility for need-based scholarships and financial aid.

When setting up a UTMA account, the donor must provide the name and social security number of the minor. It is important to note that any gifts made to the account are irrevocable, and the custodian cannot place any restrictions on how the money is used once the minor reaches adulthood. Therefore, careful consideration should be given when appointing a custodian.

An adult guardian can be designated to receive the payment on behalf of the child

The benefit of assigning a custodian is that the child will eventually be able to use the death benefit as they need to. However, there are some disadvantages to this approach. Firstly, the transfer process can be expensive and reduce the funds available to the child. Secondly, the court will appoint the custodian, meaning the policyholder loses control over who handles the funds.

To avoid the drawbacks of assigning a custodian, the policyholder can instead establish a life insurance trust. A life insurance trust is a legal entity that holds assets that are managed and distributed by a designated trustee. The trustee can be a trusted relative, partner, friend, legal representative, or other adults chosen by the policyholder. The trust, rather than the child, is listed as the beneficiary, and the trustee routes the money to the child per the policyholder's wishes and guidelines.

Frequently asked questions