Why You Should Never Name Minors as Your Beneficiaries.
Who should you never name as beneficiary?
Listen to this Article on:
Beneficiary Mistakes to Avoid.
There are two main problems with naming a minor as the beneficiary of your will, life insurance policy, annuity, IRA, or retirement account. The first is that a large sum of money cannot be left directly to a minor. Instead, a California Orphan’s court will likely have to appoint a
guardian over the minor’s Estate to hold and manage the money. Your Estate will have to pay attorney fees to handle the guardianship proceedings to appoint the guardian, and the guardian may not be someone you want to oversee your children’s money. The Guardian of the
Estate will have to file annual accountings with the County Orphan’s court, generating more costs and fees for your Estate.
The other problem with naming a minor as a beneficiary is that the minor will be entitled to the funds from the guardian when they reach age 21. There are no limitations on what the money can be used for, so while you may have wanted the money to go toward college or a down payment on a house, your child may have other ideas.
The Beneficiary Checklist: 7 Mistakes to Avoid!
Do you intend to leave a legacy? Utilizing life insurance and selecting beneficiaries for your policies or other accounts make leaving legacy gifts simple, keeping them out of probate or the state courts. That is unless you make a critical mistake. We wrote this beneficiary checklist to help you avoid it!
Please Help Us Spread The Word By Giving Us a 5 Star Rating on This Article
Free Initial Consultation with
Steven F. Bliss Esq.
★ ★ ★ ★ ★
The Beneficiary Checklist:
1. Always keep policy and beneficiaries up-to-date.
2. Always have secondary and tertiary beneficiaries.
3. Never name minor children as life insurance beneficiaries. Instead, put a trust or guardian in place.
4. Never name your Estate as your life insurance beneficiary.
5. Always specify the details.
6. Never name a beneficiary dependent on government assistance as a direct beneficiary.
7. Don’t assume your will trumps the life insurance policy.
There are, of course, ways to keep the trust mostly in control of the family, which might be minors. One way to get around these problems is to create a pour-over trust in your will and name the minor as the trust’s beneficiary. A trust ensures that the trustee protects the funds until
a time when it makes sense to distribute them. Trusts are also flexible in terms of how they are drafted. The trust can state any number of specifics on who receives property and when, including allowing you to distribute the funds at a specific age or based on one particular event, such as graduating from college. You can also spread-out distributions over time to children and grandchildren.
If you create a trust, remember to name the trust as the beneficiary of your life insurance, IRA, annuity, or retirement plans. For example, if the minor’s name were John Smith, you would have language that states, “In Trust for John Smith under my will dated August 20, 2020, and as the
same which may be superseded or amended by a later will.” If you forget to take that step, the money will be distributed directly to the minor when they turn 21, negating the work of creating the pour-over trust in your will. Call if you have any questions or need help with your estate plan.
Naming your Estate your beneficiary
Life insurance can be an essential tool when you are planning your estate – and it may be tempting to list your Estate as your life insurance beneficiary. After all, you’ve likely designated how it should be dispersed to your dependents in your will and testament. But listing your Estate as your life insurance beneficiary can have severe ramifications for your loved ones. A death benefit payout to your Estate can mean they don’t get the full death benefit – or any of it at all.
This is because of how your Estate and assets are handled after your death. Instead of being immediately dispersed as you designated in your will and testament, they’ll first go through a probate process, where a judge determines what debts, you owe. If you have any outstanding debts, then creditors will first be able to collect repayment from your Estate. Once those debts are settled, the rest of your Estate will be dispersed as per your wishes.
The life insurance death benefit, on the other hand, isn’t subject to a probate court and can’t be paid out to anyone besides the beneficiaries you listed in your policy. This means creditors can’t collect your life insurance policy’s death benefit if they aren’t listed on your policy, regardless of your debts.
By listing the people you’re trying to protect in your policy, you’re making sure that they’re the ones who will receive the death benefit. But if you list your Estate as the beneficiary, there’s a chance they won’t.
Naming your pet as your beneficiary
You love your furry friends and want them to be happy and healthy. But that doesn’t mean that you should name your pet as your life insurance beneficiary. For starters, pets don’t have bank accounts. They can’t manage money, so the life insurance company wouldn’t have anywhere to send the death benefit if you listed your four-legged friend as your policy’s beneficiary.
But just because your pets can’t accept the life insurance payout doesn’t mean you can’t use it to protect them after you’re gone. The best way to leave money behind for your pet’s needs, such as food and vet bills, is to list their designated caretaker as one of the beneficiaries of your life insurance policy and leave behind detailed instructions for your pet’s care. You can also set up a pet trust that your policy pays into, establishing exactly how the funds will be used and who will be responsible for your pet.
Even if you were diligent about listing a primary and contingent beneficiary or multiple beneficiaries when you bought your policy, if they all pass away and cannot accept the life insurance death benefit, your policy would be paid out to your Estate. At this point, it would go into probate, be collected by creditors for any outstanding debts, and then the remainder would become a part of your Estate or dispersed amongst your heirs, according to your will and testament.
To ensure that you have viable life insurance beneficiaries, you should always keep your policy up to date and adjust it with every significant life change, like a marriage, divorce, or death. Generally, changing your life insurance beneficiary can be a seamless process and is done in your online portal. However, some life insurance companies may ask that you mail in a change of beneficiary form verifying your adjustments. And it would be best if you always had contingent beneficiaries listed if your primary beneficiary (or beneficiaries) die. If you have multiple people that depend on you financially, you can even discuss whether or not you should set up a per capita or per stirpes death benefit with your life insurance agent. “Per capita benefits are equally distributed to all living beneficiaries, whereas per stirpes payments are distributed to living beneficiaries and any deceased beneficiaries’ heirs.” You pay your policy premiums to safeguard the financial security of your loved ones – and it’s vital to have the proper beneficiaries noted in your policy so that your life insurance coverage does what it’s meant to do.