Children as Life Insurance Beneficiaries
by karls | December 12, 2008
When completing a life insurance application people often list out all the people they love most in the world, sometimes without thought to the meaning of primary or contingent beneficiaries. When minors are involved, the primary beneficiary is most often the person who will be caring for the children and taking care of them financially. In a family situation the wife should be the beneficiary of the husband’s policy and the husband the beneficiary of the wife’s. The children should be listed as contingent beneficiaries.
What should you do if you are divorced, or your spouse has died? You want to take care of your children in the event of your death, but children cannot cash checks, and you certainly wouldn’t want them to handle large sums of money. How do you specify the beneficiary so they will be taken care of? Fortunately, a statute has been adopted in all states to take care of this situation. It is called the Uniform Transfers to Minors Act or “UTMA”.
Think of UTMA as a mini-trust with standardized language that does not need an attorney to set up. An UTMA account can be set up at a bank or brokerage company. Under UTMA an account can be set up for a minor using the minor’s social security number. The UTMA account will require a custodian be named to manage the account.
When specifying a life insurance beneficiary to benefit a child you should write “(Name of Custodian), as Custodian for (Name of Minor) under the (Name of State) UTMA.
It is important to understand the difference between a custodian and a guardian. The custodian of a child manages the child’s money and potentially other assets such as real estate, stocks, bonds, art and other collectibles, automobiles, patents, royalties, and other assets of value. The guardian is responsible for the child’s health, support, and maintenance, just like a parent.
You can see how a person could specify one person to handle their children’s finances should something happen to them, possibly through a beneficiary designation on a life policy, and another person to care for and nurture the child until they are an adult. It is important to have a will to specify who the preferred guardian is, otherwise a court will appoint someone. The court’s choice may not be who you would have chosen! The same goes for the custodian. Though a life insurance beneficiary is a matter of contract and is clear on who the check will be written to, a custodian should be specified in the will to take care of other assets.
Money in a custodial account irrevocably belongs to the minor, but is controlled by the custodian until the minor reaches the age of trust termination. The age of trust termination is 18 or 21, depending on the state. The custodian has the fiduciary responsibility to manage the money in a prudent fashion for the benefit of the minor. UTMA accounts are required to remain open until the child reaches the age of majority in their state. An UTMA account will stay open, even with a zero balance, until the minor reaches the age of majority and has the irrevocable right to receive the funds. If the account has been spent down the UTMA beneficiary could sue the custodian if the funds were not used for the minor’s support.
If a beneficiary designation for a minor is not properly specified, costs will be incurred. A court is appointed to manage the child’s funds until a custodian is determined. I have heard of several cases where a child’s guardian had to go to a court with a list of expenses and ask to make a withdrawal from the child’s insurance proceeds. The court also charges a fee for every appearance. Not only is it inconvenient, it can be expensive.
Choosing your beneficiary is the most important choice you make when setting up your life insurance. Getting it right is the job of your licensed representative. Take advantage of their knowledge and training and get it right for your sake, and your beneficiaries.
If you are leaving your death benefit to your minor children, make sure that you set up a UTMA account. This will save a lot of headaches for your children and their guardian if something should happen to you! It’s easy to do, just go to your bank or brokerage and set up the account with your children’s guardian as the custodian. When your children are 18 (or 21 in some states) the UTMA will expire and they can transfer the money into their own account.
Just do it!
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I would only do this if I REALLY TRUST the person I assign to take care of my kids money. I know you can sue these people, but they can probably argue that something was to their benefit for almost any action. A suit would also just be messy (but then again, lets never hope any of us have to deal with any situation even vaguely like this).
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So, this is something i’ve been pondering for a bit, after reading this article. I have a 19 year old son in a state that i know requires him to be 21 (as this article mentions). I’m trying to figure out what to do about willing both my life insurance to him (my wife and I are divorced) and with dealing with my will. This article has certainly got me thinking, and I’ll probably go talk to my insurance agent or accountant sometime in the near future. Happy Holidays evereyone!
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karls Reply:
December 22nd, 2008 at 7:47 am
You should consider who you would want to handle his money until he is 21. Do you trust your ex-wife to do what’s right for your son? If you do, name her as the UTMA custodian. If not name someone else. Happy Holidays to you as well!
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I consider myself fortunate that I have several people in my life that I would trust as custodians for my two daughters should anything happen to me, but I know that these situations can be very transformative for a lot of people. I’ve heard many horror stories about custodians depleting vast sums of money and not having to face any legal ramifications whatsoever. Even custodians who initially have god intentions can become selfish and irresponsible with the assets. And moreover, some custodians simply don’t have good management skills and lose the assets through poor planning, bad investments, or other such missteps. Please don’t get me wrong, these UTMA funds are the right way to go, just be VERY wary of with whom you’re entrusting your child’s future.
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Thank you Efinancial! This is fantastic advice. I am lucky to be in good health, but we all go sometime and I’ve got 3 young children who won’t be 21 for quite some time. I want to make sure their lives are well taken care of in the event of my passing, and unfortunately I lost my wife 5 years ago during childbirth. I couldn’t imagine leaving my children with nothing, but I really couldn’t imagine leaving my life savings, money that should belong to my children after my passing, with someone I don’t trust. I can think of about 3 people a court might appoint, and I don’t trust any of them as much as I trust my personal choice. I suppose I should consult my lawyer about this. Thanks again Efinancial!
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karls Reply:
December 22nd, 2008 at 7:51 am
Consulting your lawyer is a good idea for changes to your will. Life insurance is a contract and does not pass through probate at your death. You can make the UTMA decision and change with a change of beneficiary form. All companies have them. You can get one through customer service at the carrier your are insured with. I am sorry to hear about your wife. I’m glad to hear you have coverage for your children in case something happens to you.
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I\’ve read that \”gifting\” an insurance policy to your children is a good idea to avoid estate tax on the proceeds, since the life insurance is owned by the children outside of the estate. But what if your children are minors? Does this require an irrevocable life insurance trust, or can minors be owners of an insurance policy with a UTMA designation somehow?
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