Providing for your loved ones when you pass away is a major motivating factor in estate planning. Nonetheless, making your minor child a beneficiary of your life insurance policy is not a sensible way to do this. In this blog, we will consider the significant drawbacks of taking such an action and discuss more effective ways of transferring assets directly to your child.
5 Challenges and Risks of Naming a Minor as Your Life Insurance Beneficiary
While making your minor child the beneficiary of your life insurance policy may seem a straightforward method of leaving resources for their care, taking this step presents several problems, including the following:
1. Guardianship Issues
Because the law deems minors incapable of managing finances, naming your minor child
will require the court to appoint a legal guardian to oversee the inherited funds until your child reaches the age of maturity.
2. Losing Control of How the Funds Will Be Used
Once the funds are under guardianship control, your wishes for how the funds will be used no longer take priority. Your child’s guardian will be the person managing investments and expenditures. This means there is the possibility that these funds will be used in ways that don’t meet your intentions or serve your child’s best interests.
3. Risking Mismanagement
Since you will have no control over naming the guardian the court appoints, you do not
know if that individual will be astute about financial matters. If the guardian is ill-informed or inefficient, the insurance benefits you leave for your child may be mismanaged. Poor investment strategies or financial decisions could result in losses that decrease the value of your child’s inheritance and threaten their future financial stability. There is even a danger that the funds will be intentionally misused.
4. Delays in Access to the Funds
Because of the need for the court to intervene in the process, there may be bureaucratic delays in access to the insurance benefits. This may result in a delay in meeting your child’s needs at a crucial time.
5. Adverse Tax Implications
Life insurance payouts may be subject to unexpected taxes when left to a minor child. Depending on the amount and structure of the funds, taxes could consume a significant portion of the proceeds.
Alternative Ways to Leave Funds for Your Minor Child
To avoid the negative consequences of making your minor child a beneficiary of your life insurance policy, let’s look at some more productive ways of leaving an individual legacy, ways that could help minimize tax burdens and ensure financial stability.
Create a Trust that will allow you to dictate how and when the funds will be disbursed.
The trust can state the purposes for which the resources will be used (e.g. education, healthcare) and the trustee you appoint will be required to manage the funds according to your specific instructions. You can even stipulate conditions your child must meet to receive the funds, such as finishing a certain level of education or being gainfully employed.
Designate a Custodian To Transfer Funds
Under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA), you can transfer funds to a custodial account for the benefit of your child. Once they reach the age of majority, they will gain control over the funds. The UGMA and UTMA differ only in that the UGMA contains only financial products (e.g. stocks), while the UTMA also contains physical assets like real estate or fine art.
Name an Adult Custodian as a Beneficiary
Another possibility is naming a trusted person as the beneficiary and instructing them to use the funds for your child’s benefit. This approach may be a simple way of having your precise wishes followed while avoiding the legal complexities associated with naming a minor as a beneficiary.
Contact Our Experienced Estate Planning Attorneys Today
However you choose to protect your child’s financial future, you need excellent legal counsel.
If you reside in Southeastern Massachusetts, the knowledgeable lawyers at Surprenant & Beneski, P.C. are accessible and highly responsive. Contact us now to discuss this matter with true professionals.