Your children are your pride and joy. It’s no surprise that at some point or another, every parent likely becomes concerned about who will care for a minor child or children if one or both parents die or are incapacitated. From a financial perspective, many parents turn to life insurance in an effort to take care of their family in the event of death. While it is true that life insurance is a helpful financial tool to protect your loved ones, it is just as important to consider how to leave your assets to your minor children. Beyond this, you should also consider how to incorporate your retirement money (IRAs and 401(k)s), another common, significant asset into your overall estate plan.
When you purchase life insurance, you will name a beneficiary of the death benefits and retirement accounts. But, if you don’t have a system in place and your children are minors at the time they inherit these assets, the court will appoint a property guardian or a conservator (the title depends on state law, but the role of this person is to “watch over” a minor person’s money). This process will require attorneys’ fees, court proceedings, supervision from the court, and will limit investment options — all costs and delays that will not help your children, but can cost them a significant percentage of their inheritance.
Another downside? Whatever’s left when the child becomes an adult (usually age 18, but may be, 19 or 21, in some states) will be handed over, without any guidance. This can impact college financial aid opportunities and open up an opportunity for irresponsible spending.
How To Leave Assets?
There are several ways in which you can structure your life insurance policies, retirement accounts, and overall estate plan to benefit your minor children in the most streamlined way possible.
1. First, use a children’s trust to manage the money for the benefit of your children.
This lets you designate someone you think will manage the assets well, rather than leaving it to the whims of the court. You will want to do this instead of naming minor children as beneficiaries.
2. Second, select and name a guardian to handle the day-to-day care for your children.
This person can be different than the person managing in the money, which can sometimes work well depending on the amounts involved and the different skill sets needed to manage money versus raise children.
3. Third, if you have a living trust, make sure you have properly funded the trust and aligned your retirement assets with the plan.
If you do not yet have a trust, consider the benefits of one over will-based planning. Both types of plans will allow you to designate how much and when your children will receive the money, but a trust–based plan will allow you to do so without court involvement.
Benefits of a Trust
Generally, parents list a minor child as the secondary or contingent beneficiary on life insurance and retirement accounts after first naming the surviving spouse as a primary beneficiary. This may work, as long as everyone dies in the “right” order and at the “right” time. But, it’s a gamble, and providing structure through a trust for these inheritances is a better option. Unlike guardianship or custodian accounts, where the proceeds must be handed over once the minor(s) turns a certain age, you can specify at which age your child receives the assets. T
his allows you to designate how the money is to be used, so it will be available for the important life events, while protecting your children from reckless spending. Ultimately you have more control with a trust, and your customized plan will provide the best protection for your family.
If you have any questions about how to leave assets to your minor children — whether it is a life insurance policy, a retirement account, or any other asset — contact us today. A legal professional can explain the options available to your family, determine what tax implications will result, and advise you on the best structure that will protect your family’s needs.