I enjoy working with parents of young children and it’s always a great joy to help them plan for the future. Even though I’m an attorney and not a financial professional, I take a holistic approach to my practice and really want to understand the assets that we are planning for. During the first meeting together, I review my clients’ financial statements so that I can get a better idea of what they currently have in place. One thing that I see much more often than I would like to, is that parents have named their minor children as the beneficiaries of their life insurance policies! Or, even just as frightening, they have named the legal guardian (the person who will raise the children if something happens to them) as the beneficiary of the life insurance policies. Why should you steer clear from doing the same thing?
Naming minors as beneficiaries of a life insurance policy can have unintended, but pretty severe consequences.
Yes, the purpose of a life insurance policy is to take care of the child’s financial needs if something happens to you. However, we do not have to name the child as the beneficiary to accomplish this objective. If a minor child is named as a beneficiary and something happens to you before the child reaches the age of majority (age 18 in the state of Georgia), then the court would have to get involved. An administrator would need to be appointed to manage the funds for the benefit of the child and when the child reaches the age of 18, any remaining funds would be distributed to that child, outright! Remember, life insurance policies are one of the few assets that can be passed down and managed without court intervention, but only if you have properly designated the beneficiaries for these policies. Would you want someone that doesn’t know you, your family or your children to be in charge of something so important? Probably not. Further, would you want your child to possibly receive a good chunk of money at the age of 18, with no supervision or rules? That could be disastrous!
Naming the legal guardian as the beneficiary means you’re giving up control.
Many more parents make the mistake of naming the person they want to raise their children, the legal guardian, as the beneficiary of the life insurance policy. You obviously trust this person to raise your children, but understand that once this money is distributed to the beneficiary, you no longer have any control over how that money is used. There is no guarantee that the money will only be used for the benefit of your children. Even scarier, what if something happens to the legal guardian? Since the life insurance money is payable outright, with no rules, restrictions or protections, it is technically a part of the legal guardians’ estate and can pass down to their heirs if something happens to them! It is very possible that your children might not benefit from the assets you’ve left for them to provide for their needs.
How does our firm help families plan around these issues? Most of our clients with young children will choose to use a revocable living trust for their planning to avoid these two common mistakes and potential consequences. Naming the revocable living trust as the beneficiary allows parents to create rules specifying how the money should be used for the benefit of the children without court involvement. It also protects the children in case something happens to the legal guardian, making sure that the money is always used for the children’s benefit. Lastly, through the living trust, parents can dictate how and when their children would receive any outright distributions from the trust. Parents can choose certain ages or life events (ex. to start a business, marriage, etc.) where distributions can be made outright to the adult child.
If you would like to learn more about protecting young children through estate planning, register for one of our free educational workshops or call us at (404) 267-1377 to schedule your initial consultation.