When it comes to estate planning and will preparation, designating beneficiaries is a crucial step. A beneficiary is a person who will receive assets or benefits after the death of the account holder or policyholder. While adults can easily be named as beneficiaries, the question often arises: Can a minor be a beneficiary? The only way to leave assets to a minor is through a trust; otherwise, the assets can create a tangled mess for heirs. A recent article from yahoo! Finance, “Can I Name a Minor as a Beneficiary?” explains how to address this fairly common issue. An estate planning lawyer can help you set up the right kind of trust.
Property and estate laws are all state-specific, with each state having laws for property rights, insurance, and estate laws. The age at which a person becomes a legal adult varies by state. A local estate planning attorney will be needed to ensure your wishes comply with your state’s laws.
Four primary documents are used to name a beneficiary:
- Wills: The beneficiary is someone named to receive assets from the estate.
- Life Insurance: The beneficiary is the person who receives a payment from the life insurance policy after the policyholder’s death.
- Retirement Accounts: The beneficiary receives the assets in the account after the account owner’s death.
- Trusts: the beneficiary receives assets from the trust based on the terms of the trust and the trustee’s management.
In general, no strict laws prevent a minor from being designated as a beneficiary. In this context, a minor refers to an individual under 18, who is not legally considered an adult yet. However, designating a minor as a beneficiary comes with certain considerations and potential challenges that must be carefully addressed.
Legal minors are children who have not yet reached their state’s age of majority. Most states set the age of majority at 18 (New York, although a handful of states use ages 19 or 21 when a child becomes a legal adult. Legal minors may not take legally binding actions, including signing enforceable contracts or participating in financial transactions. They also may not inherit directly through a will or receive assets through a life insurance policy or retirement account.
However, minors may be beneficiaries of a trust, since the trust’s beneficiaries do not participate in contractual or financial transactions. The trustee manages the assets in the trust and distributes them per the trust’s terms. This can range from making college tuition payments or sending assets to the beneficiary in a simple property transfer.
Most people expect their children won’t inherit from a will or a life insurance policy for many years,.However, what happens if the parent dies while the child is still underage? If this happens, the assets are distributed to an entity that can legally receive the property and hold it on the minor’s behalf until they reach the age of majority.
There are typically three scenarios:
Legal Guardian. The guardian receives the assets and holds them on the minor’s behalf until they reach legal age.
Custodial Account. Assets are placed into an account, and a legal adult is appointed to manage the assets until the minor reaches the age of majority. This varies depending on the nature of the assets and the custodian. A parent or guardian typically acts as the custodian. However, the court will name a guardian if there is no parent or guardian.
Trust. Assets are placed in trust on behalf of the legal minor. A legal adult is named the trustee to manage the trust, with the legal minor named the beneficiary. If no trust has been created, a probate court oversees the creation of a trust and distributes all of the assets when the child reaches majority.
Advantages of Using a Trust
- Asset Protection: A trust ensures that the assets are safeguarded until the beneficiary reaches the age of majority or a specified age mentioned in the trust document.
- Controlled Distribution: The grantor can stipulate how and when the assets should be distributed to the beneficiary, ensuring responsible financial management.
- Avoiding Probate: Trusts can help bypass the probate process, saving time and potentially reducing costs.
Considerations for Choosing a Trustee or Guardian
Selecting the right trustee or guardian is crucial. The trustee will be responsible for managing the assets in the trust, while the guardian will care for the minor’s personal and everyday needs. Often, the same person can fulfill both roles, but it’s essential to choose someone who is trustworthy and capable of handling these responsibilities effectively.
IRA or Retirement Accounts. IRAs or retirement accounts are treated differently. Under the SECURE Act, a minor may only take assets from an IRA and must leave the money in place once they turn 18. Then they must take all assets out within ten years.
Considerations for Choosing a Trustee or Guardian
Selecting the right trustee or guardian is crucial. The trustee will be responsible for managing the assets in the trust, while the guardian will care for the minor’s personal and everyday needs. Often, the same person can fulfill both roles, but it’s essential to choose someone who is trustworthy and capable of handling these responsibilities effectively.
Updating Beneficiary Designations
Life circumstances change, and it’s crucial to regularly review and update beneficiary designations. If a beneficiary becomes a legal adult, it might be appropriate to update the estate plan or trust to reflect the changes in their life circumstances.
Conclusion
Leaving the distribution of assets to a beneficiary without proper planning could place a minor’s financial well-being at risk. A court-appointed custodian is probably the last way any parent wants their child to receive assets. Parents with minor children are advised to meet with an estate planning attorney to ensure that their children are protected should unexpected events occur, such as the death of one or both parents while the child is not yet of legal age. Contact us for the best way to leave property to your young children.
Reference: yahoo! finance (June 19, 2023) “Can I Name a Minor as a Beneficiary?”
