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Now’s Not The Time For Cute: Don’t Name A Minor As A Life Insurance Beneficiary

Avoid common estate planning mistakes and learn the best ways to financially protect your children.

We all wish the best for our children and want to protect, assist, and support their future endeavors. This desire for financial protection – as well as the assumption they’ll be the sole heirs should anything untimely happen to us – may lead a person to list their minor children as beneficiaries or contingent beneficiaries on Life Insurance policies or investment accounts. Isn’t protecting children the reason most people purchase Life Insurance in the first place? What people may not realize is that if an unexpected death occurs, financial institutions can’t permit insurance payments to go to minors. This doesn’t mean the money disappears, it’ll get to the kids eventually but it first has to go through an adult.

Children simply don’t have the maturity, life experience, or financial acumen to understand how to handle large financial decisions (adults can have trouble too), so naming them as beneficiaries could unintentionally cause problems and unnecessary legal expenses. Imagine if a 12-year-old got a check for half a million dollars?

When financial institutions refuse the payout to children, the next step requires a court order from a legal guardian of the person or guardian of the estate. This assumes you’ve named one – or two if you want to name one person to care for the children and another to manage their finances – and they’re legally in place. If not, then someone will have to petition the court and go through the process of becoming the legal guardian. Once that’s accomplished the guardian can then begin the procedure to obtain and manage money designated for the children, which can be another time consuming and costly legal procedure.

To skip all this madness, simply don’t name an underage child as your beneficiary. Ever.

If you can’t name your children as your beneficiary, then what’s the best way to ensure their protection and financial well being? How can you be sure they’ll be able to access your money when they need it, or that a guardian won’t use it to buy a boat and sail away forever? For that you need a plan and it all starts with your Will.

Why A Will?

You need to create a Will because that’s where you name a guardian, and alternate guardians if something happens to your primary pick. A Will also accounts for your assets and naming an executor to wind down your estate, but when young children or special needs adults are depending on you, guardianship is a Will’s most important purpose.

Decide On A Guardian

For years we’ve said over and over again that this is probably the most difficult decision a parent has to make: Who would raise your kids if you weren’t around to do it? What parents might not realize is that if you don’t do this then confusion, delays, and expenses will be incurred and ultimately the court will make the decision. If this happens there’s no guarantee your children will end up with a person you’d want to raise them, which means you need to make a decision so it never comes to that.

If you want to break up the responsibility between care and finances because you have worries the person guardian isn’t good with money, you can name two different people, like we mentioned above – Guardian of The Person vs. Guardian Of The Estate. If you choose to do this it’s best to let the people you name know in advance, especially if they’re not on great terms, because they’ll have to work together to do what’s best for your children (and you won’t be around to referee).

Establish A Trust

When minors and large sums of money are involved, it makes sense to create a Trust. This is how you can really be a hero to your children because you can create rules for exactly how the money you leave them should be spent. You’ll have to name an adult as a trustee, which can also be a financial professional or institution, to manage the Trust and abide by its rules.

Benefits of this include being able to avoid probate (something you most certainly want to do), and preventing the money from being diverted to any other purpose that isn't laid out in the Trust. It can be more complicated and expensive to create and manage than putting everything in your Will, but it’ll benefit your children and other heirs later. For example, if you have a Life Insurance policy you can name the Trust as the beneficiary. This sounds complicated because it is so if you go this route hire an estate attorney or financial professional to make sure it’s done correctly.

Review All Your Beneficiaries

Whether it’s for Life Insurance (either a standalone policy or one you have through your job), investment accounts, retirement accounts, or any other account with a Transfer On Death (TOD) component (standard bank accounts), it’s important to consider who you are listing as the beneficiary.

You can list more than one person, a group of people, a Trust, a charity, or even your estate. Since minors can’t directly receive benefits, as we’ve been establishing this whole time (you have been paying attention, right?) don’t list any minors as a beneficiary.

Consider this too: In some states naming a spouse as a beneficiary might be assumed, but if that’s not what you wish you’ll have to take it upon yourself to name someone else. It’s also important to revisit beneficiaries at different points in your life, especially when your children become adults and can be listed as beneficiaries without having to jump through any hoops. Depending on their age and level of responsibility, you might want to put safeguards in place – like a Trust or another structured payout process as opposed to a lump sum – so the money lasts long enough to even benefit any possible grandkids too.

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