If you are one of the millions of parents who own a life insurance policy, you may have your child named individually as a primary or contingent beneficiary if you were to pass away while the policy was still in effect. However, naming a child individually, especially under the age of eighteen, can have unintended consequences. Thankfully, these consequences can be avoided with careful planning and a properly executed estate plan.
The payout
A life insurance company cannot legally pay life insurance proceeds to a minor. The proceeds would typically be handed over to a conservator, who is usually appointed through a court proceeding. This person would manage the money on behalf of the minor until the age of eighteen, at which point the money would be distributed outright to the child. Many estate planning clients are surprised to learn this and don’t like the idea of potential court involvement and an eighteen year old potentially receiving a large inheritance. Rather, most parents would like to postpone the receipt of a large payout until an older age, such as twenty-five or thirty, and also nominate the person who would potentially handle the proceeds on behalf of the minor, without court involvement.
The Planning Process
To maintain more control and designate who would manage the assets and at what age, you can establish a contingent trust. A contingent trust can be created in a Will and comes into existence or begins to operate only if a specific event occurs. In the trust language, you can nominate a “trustee” who would be the gatekeeper of the money until your child reaches a certain age. This money could be distributed outright at a specific age, or in installments over a set time or at designated ages. You can also specify for what purpose(s) the money should be used such as health, education, maintenance and support.
Once the trust has been created, rather than keeping your child named individually as a beneficiary, you should change the beneficiary to be the trustee of the trust established under your Will. This is a relatively easy change that can be handled with a change of beneficiary form completed by you or the life insurance company.
Review your beneficiary designations
Life insurance can be a very important piece of protection for your family should something ever happen to you. As noted in Chris Hiestand’s post in February, it is worth taking a few minutes to review your beneficiary designations to assure that they are set up properly, so as to avoid the unintended consequences discussed above. Also, it is important to check beneficiary designations on a regular basis, or certainly after a major life event, such as marriage or birth of a child.
