When naming a minor as beneficiary, the asset should be paid to a trust. Otherwise, the beneficiary designation can create a tangled mess for the recipient and their family. 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. It can be part of a will or in a revocable living trust.
Property and estate laws are all state-specific, with each state having its own 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 that 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.
Legal minors are children who have not yet reached their state’s age of majority. Most states set the age of majority at 18, 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 that 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? Naming a minor child as a beneficiary is a problem because the child cannot legally contract or manage assets. 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. When naming a minor child as beneficiary without other planning in place, the result is an unwanted guardianship proceeding. We have filed for a parent to be able to receive the funds in the capacity of guardian, with very narrow terms, and with the child then getting unfettered access to the funds at the age of majority, which in Maryland is age 18.
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.
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.
Naming a minor child as beneficiary leaves the legacy of a hassle, and 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.
Reference: yahoo! finance (June 19, 2023) “Can I Name a Minor as a Beneficiary?”