Should I Name Minors as Policy Beneficiaries?
Minor oversights can have big consequences.
Take life insurance, for instance. Many people name their children as beneficiaries when they buy life insurance, and never give the matter another thought. On the surface, it makes sense to designate your children as beneficiaries.
After all, you’re buying the coverage to protect them. Right?
But if you die while your kids are minors, they may not receive the proceeds from your life insurance policy immediately. Here’s why:
In most jurisdictions, in the interest of protecting the assets of a minor, state law requires that a guardian be appointed to administer the proceeds payable to the minor child.
If a guardian is not already in place, your next of kin will have to undergo the time and expense of appointing a guardian to receive and administer the proceeds.
Once a court appoints a legal guardian of the minor’s estate, that guardian will control the money for the minor’s benefit until he or she reaches the age of majority, depending on state law.
Additionally, if you have a special needs child or adult you care for, inherited funds from you or anyone else may put their government support in jeopardy. This may disrupt the care and support programs they depend upon for their daily and future care.
All this means one thing: Be very careful about naming your kids as beneficiaries. It could be years until they receive the money you intended for them—potentially delaying their education, disrupting their housing and quality of life, and more.
OK-how to help ensure that minors, through the people entrusted with their care, have access to the life insurance proceeds intended for them?
A solution: The Uniform Transfers to Minors Act
The Uniform Transfers to Minors Act (UTMA) is the easiest way parents can ensure their children receive proceeds from a life insurance policy (or other assets, such as mutual funds, stocks, bonds etc). Under UTMA, an adult sets up an account for a minor at a life insurance company, bank or other financial institution. A custodian, named by the parents, controls and manages the assets for a minor until the minor reaches the age of majority as defined under the UTMA statute for that particular state (usually between 18 and 21) At that time, the assets are turned over to the adult child, who can use the assets in any way he or she chooses. Currently, UTMA is in effect in all but two states: South Carolina and Vermont.
Another solution: Establish a trust
A trust is a more detailed arrangement than a UTMA designation, and provides increased control over how assets can be used. For example, a trust can be established to receive and manage the life insurance proceeds on behalf of minor children or adult family members with special needs. In this situation, the trust is designated the beneficiary of the life insurance proceeds.
Here’s the advantage: You (the insured) establish the trust, select the trustee, and establish the terms under which assets can be used and distributed from the trust.
In this way, the life insurance proceeds can be used precisely how you intend to take care of the people you love. This often works in the best interests of minor children and other dependents.
And of course, it works in your best interest because it gives you extra peace of mind.
Here is a typical scenario that illustrates common problems and how a trust or UTMA designation may have made a difference:
You name your minor children as primary beneficiaries outright. You die while the children are still minors, leaving them a large sum of money, but with no guardian or other representative to receive and administer the proceeds on their behalf.
What happens next?
In this situation, the stage is set for guardianship complications. Although it’s difficult to imagine, the courts may appoint a stranger as guardian. Or, even if a close relative is selected, this individual may have limited discretion regarding how the funds can be used, which may not match your intentions.
Simply put, it makes good sense to explore available options when considering naming minors as beneficiaries of your life insurance.
Talk to your attorney about a strategy that is appropriate to your own situation, especially pertaining to the use of trust arrangements. Then be sure to make any changes needed regarding your existing policies, and make sure you have adequate coverage to protect the people you love.
Important note: It’s not sufficient to indicate in your will your life insurance beneficiary. If your will names a life insurance beneficiary and the policy indicates a different one, this ambiguity may cause a delay in the distribution of proceeds-with no assurance how the money will be distributed. We want you and the people you love to avoid this circumstance—talk to your attorney about making the proper arrangements.
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This information is courtesy of New York Life Insurance Company, used with permission. It is intended exclusively for general information only.