Avoid Naming Your Minor Children as Beneficiaries

Beneficiary designations can be an effective tool to avoid probate, if used appropriately. (See Beneficiaries Instead of Probate: Use Caution). Assets can go quickly and directly to loved ones after your death. However, there are certain types of beneficiaries that should be avoided. First and foremost – no minor beneficiaries!

I recently represented a widowed mother of three minor children. Her husband had named as beneficiaries on his life insurance policy his wife (50%) and his three minor children (50%). After his death, my client contacted the insurance company and provided the death certificate and requested payout of the insurance proceeds. However, because half of the proceeds were going to minor children – the insurance company required that a guardianship of the property of the minors be established prior to the issuance of the checks. Additionally, the insurance company even refused to pay the 50% due to the wife until the guardianships for the minors had been established. This created a nearly 6-month delay in her receipt of the life insurance proceeds!

Minors cannot legally own property. They are legally incompetent. Therefore, if a minor is receiving assets as a beneficiary – a guardianship of the property must be created. Establishing a guardianship is time consuming and costly. In Maryland, it usually takes about six months to set up a guardianship. You can expect to pay anywhere from $2,500 to $5,000 in initial attorney’s fees and this amount does not include the yearly accountings required by the court.

In my client’s case, guardianships for the minor children was clearly not what the deceased husband would have wanted. Not only were the children’s life insurance proceeds reduced by attorney’s fees, but now my client, the mother, is required to provide yearly accountings to the court with regards to her children’s life insurance proceeds.

The necessity for a guardianship could have been avoided with proper estate planning advice. In this scenario, I would have advised the husband to name his wife as 100% beneficiary of the life insurance proceeds. The wife could then have managed the entire amount of the proceeds for the benefit of the family without any sort of court intervention. The husband may have wanted to name the children as contingent beneficiaries in the event his wife had predeceased him or died under the same circumstances. If that were the case, I would have recommended naming a trustee or custodian for the minors in the beneficiary designation.

Most states have adopted the Uniform Transfers to Minors Act (UTMA). This act allows you to transfer money to someone you designate as the custodian for a minor. The custodian holds the property until the minor reaches age 18 or 21. Prior to reaching adulthood, the custodian can use the property for the benefit of the minor.

The UTMA has one major disadvantage in that it ends at either 18 or 21. Many people believe that a 21 year old is not responsible enough to have unfettered access to what may be a substantial some of money. The alternative to the UTMA is to create a trust for the benefit of the children. The trust would name a “trustee” instead of a “custodian.” The advantage of a trust is that the terms of the trust are completely customizable – where the statute is not. So for instance if you want half of the money to be given to the children at age 25 and the other half at 30, you can draft the trust to do just that. The disadvantage to the trust is the legal fees associated in drafting the trust document.