As you begin the process of planning for your eventual passing, you will want to create an Estate Plan which will allow you to name beneficiaries. A beneficiary is someone who receives any sort of inheritance from your Estate. These benefits could include receiving life insurance policies, savings and checking accounts, or retirement accounts upon your death. In order to have your loved ones receive these benefits, you will need to name them as your chosen beneficiary within your Estate Plan. To learn more about beneficiaries, click here.
It is common when considering beneficiaries to name loved ones as beneficiaries. Often, people will choose to name their children or even their grandchildren as their beneficiaries. However, if your children or grandchildren are still minors, naming them can lead to unexpected consequences. There are often restrictions against beneficiaries that are not yet legal adults that you will want to be aware of before deciding to name a minor as a beneficiary.
Here at Trust & Will, we want to help you understand all of your Estate planning options, which is why we will go into detail regarding the ramifications associated with naming minors as beneficiaries, and the options available to you.
Consequences of Minors as Beneficiaries
The consequences of naming a minor as a beneficiary will depend upon the item in which you are listing them as a beneficiary.
Life Insurance Policy
Most life insurance policies will not allow you to directly leave money to beneficiaries who are minors. If you name a minor as a beneficiary, they will have to settle the matter in probate court. In which an adult will be delegated to manage the money until the minor is old enough to be responsible for it themselves. This process becomes quite costly if you do not delegate a trusted adult in advance to manage the money, as it can be an expensive and long process to go through in court.
Similar to life insurance policies, minor children cannot inherit IRA account money outright. Instead, minor beneficiaries of IRA accounts, who are the children of the IRA account owner, are regarded under the SECURE Act, which states that they cannot take out the money until they reach 18. Once they turn 18, minor child beneficiaries will have 10 years to empty the IRA account completely. It is important to note that this rule only applies to children, not grandchildren or other minors. The cons of this are that minors will not be able to have access to the money early on, which may be important to you, as well as it does not apply to all minor beneficiaries.
Assets or Finances of a Substantial Value
Once again, minors cannot inherit significant amounts of finances or assets. Thus, if minors inherit any significant amount of money or property, they will not be able to take ownership of it. Instead, it will go to probate court where you can request a conservatorship in which someone will be appointed to manage the assets inherited on behalf of the minor. This will be an expensive and time-consuming process to go through.
Options to Avoid Naming a Minor as a Beneficiary
There are several options you can choose to avoid naming a minor as a beneficiary while still allowing them to receive life insurance, retirement accounts, property, and more.
Select a Trusted Adult
Instead of naming your minor child or grandchild as a beneficiary to your assets, you can name a trusted adult as the beneficiary in their place. By naming a trusted adult as a beneficiary, you can have them act on behalf of the minor, allowing the beneficiary to have access to the finances and use them for the minor’s benefit. This will allow the minor to benefit from your assets now instead of having to wait or go through legal fees and time-consuming hours in probate court.
Create a Trust
Another option is to place the finances within a Trust in which you will have the ability to leave money directly to a minor with stipulations. For example, you can state within the Trust that they will not receive their inheritance until they turn 18, graduate college, or reach some other significant milestone. This will keep their inheritance safe until they are ready to access it. The downside of this option is that they will not be able to benefit from the assets immediately as they would if you chose to have a trusted adult be the beneficiary in place of the minor.
Create a UGMA or UTMA Account
Two specific forms of Trust accounts that can be used in place of naming a minor as a beneficiary are the Uniform Gifts to Minors Act (UGMA), and the Uniform Transfers to Minors Act (UTMA). These accounts will allow you to leave inheritance, life insurance money, property, and more to minors. Each account allows you to leave specific assets, so it will be crucial to research each thoroughly and decide which is right for you. Under these acts, a trusted adult will be appointed to handle the assets left in the minor’s name until they have reached the age in which the Trust will be terminated. The age at which UGMA and UTMA accounts are terminated differs by state, but it is usually 18 or 21. It will be important to research what the age is in your state.
Deciding who to name as beneficiaries to your assets needs careful consideration when creating your Estate Plan. Trust & Will understands how time-consuming this can get, which is why we want to help simplify the process. With our online Estate Planning services, planning for your eventual passing is easier than ever before. If you are unsure where to start, take our free online quiz to allow us to set you in the right direction!
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