Most people want to pass their assets to their children or grandchildren but naming a minor as a beneficiary can have unintended consequences. It is important to make a plan that doesn’t involve leaving assets directly to a minor.
There are two main problems with naming a minor as the beneficiary of your estate plan, life insurance policy, or retirement account. The first is that a large sum of money cannot be left directly to a minor. Instead, a court will likely have to appoint a conservator, or guardian to hold and manage the money. The court proceedings will cost your estate, and the conservator or guardian may not be someone you want to oversee your children’s money.
The other problem with naming a minor as a beneficiary is that the minor will be entitled to all the funds from the conservator when he or she reaches age 18 or 21, depending on state law. There are no limitations on what the money can be used for, so while you may have wanted the money to go toward college or a down payment on a house, the child may have other ideas.
The solution to these problems is to create a trust and name the minor as beneficiary of the trust. A trust ensures the funds are protected by the trustee until a time when it makes sense to distribute them. Trusts are also flexible in terms of how they are drafted. The trust can state the specifics on who receives property and when. This allows you to distribute the funds at a specific age or based on a specific event, such as graduating from college.
If you do create a trust, remember to name the trust as beneficiary of any life insurance or retirement plans. If you forget to take that step, the money will be distributed directly to the minor, negating the work of creating the trust. Be Educated! Be Proactive!