Today, most parents with children name their children as beneficiaries of their life insurance policies. Sometimes the parents will name these children either as primary beneficiary or as an alternate (also called contingent) beneficiary. More often than not, parents do this because they believe that in the event of their death(s), their children will immediately receive the proceeds of the life insurance policies. However, this outcome is typically not the case when those children are minors (children under the age of 18 in the State of California) even though they are likely to be in the most need of financial support.
What many people don’t know is that it is customary for insurance companies to not pay the proceeds of a life insurance policy directly to minors. If no other arrangements are made and the life insurance policy simply names the children as beneficiaries, more often than not, the insurance company will ask a court to appoint a guardian to handle the proceeds of the insurance policy until the children reach majority age (18 years old in the State of California). Such a court appointed guardianship has its downfalls in that it is time consuming and expensive. It is time consuming because usually court documents and hearings are required. It is expensive in that the parents’ estate proceeds will likely bear the cost of attorneys’ fees, etc. associated with such a court appointed guardianship. Such costs deplete estate funds which should have gone to the children. But most importantly, the court appointed guardian for handling the money may be a person the parents would not have chosen themselves and also may not be the same person who is acting as the guardian of their children.
Here are two of several safer alternatives to consider instead of naming your minor child as a beneficiary of your life insurance policy which address the problem of a court appointed guardianship. The first alternative is to name an adult custodian as the recipient of the proceeds under the California Uniform Transfer to Minor’s Act (“CUTMA”). CUTMA is an account which is set up for holding and managing the minor child’s funds. CUTMA has its benefits in that it is relatively easy to set up and manage and is typically best for small estates. However, the beneficiary designation wording must be precise on the insurance policy. Also, the custodian will be able to spend the funds for the minor child’s benefit with almost no limitations or restrictions. Additionally, CUTMA requires that there can be only one beneficiary per CUTMA account, meaning that the life insurance policy must name a separate CUTMA account for each minor child.
A second and more comprehensive alternative is to create a trust with the child or children listed as the beneficiary(ies) of the trust. By doing this and in the incapacity or death of the parents, the children’s immediate needs can be met without delay. In addition, in the trust the parents can designate the ages at which their children receive disbursements from the trust, e.g. age 18, age 25, and final disbursement at age 30. Trusts can also be set up to meet specific needs of the children, e.g., disbursements are allowed for reasonable education expenses and tuition, medical care, etc. Trusts can be set up so that they become irrevocable which protects the trust funds and assets from the child or children’s current or future creditors. Trusts can be drafted to fit almost every need or desire (within reason) of any parent, especially when it comes to care and maintenance and support of children.
In our increasingly complex society, the necessity for careful thought about who is listed as a life insurance policy beneficiary is often unintentionally overlooked by people. Ultimately, careful decision making about who is listed as a beneficiary on a life insurance policy will provide clarity during difficult times for your loved ones, especially children. Because such decisions can be difficult and each person’s life circumstance is different, it is recommended that people discuss this issue and various estate planning issues with an estate planning attorney and begin planning for the unpredictable future.
-Karen J. Chilina, Attorney at Law