From checking and savings accounts to Individual Retirement Accounts (IRAs), there are endless financial vehicles for savings and retirement planning.
Life insurance is another commonly used tool for saving and family planning protection. If you are a parent and own a life insurance policy, your child may be listed as a primary or contingent beneficiary. However, naming a child individually, especially under the age of eighteen, can have unintended consequences. These may include court involvement and having a large payout to a child who cannot make good choices regarding money.
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 use 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. It is worth taking a few minutes to review your beneficiary designations of financial accounts and life insurance policies. 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.