Life insurance beneficiary who is a minor

And, often, their child or children are listed as contingent beneficiaries. That way, their children will be provided for in the case of their accidental death. When you list your child as a minor beneficiary of life insurance, some complications can arise that are important to understand and prevent. For one, if you were to die before the child is legally an adult as deemed by his or her state of residence , then he or she would not be able to receive the death benefits directly.

A child may be one of the first people to come to mind when naming beneficiaries. No offense to your spouse or anything. You want to leave them a financial legacy to make their lives easier.

However, if your children are still minors, you need to take additional steps if you choose to name them. If a minor becomes the beneficiary of a life insurance payout , then the decision regarding what to do with the proceeds is in the hands of the probate court.

The process and its associated costs could prevent the money from being utilized the ways you envisioned. You must assign a custodian for the kids. In our application process at Haven Life, if you designate a minor beneficiary of life insurance, we require a custodian to be named in order to complete your application and set up the life insurance policy. A custodian serves as the guardian of the money and assets intended for the minor child, making way for valid transfers under the Uniform Transfers to Minors Act.

A properly designated custodian may make decisions concerning those assets so long as the choices are in the best interests of the minor child. Once the child becomes of age, the assets are turned over to him or her, and the custodian no longer has a role to play.

As an example of how this might work, say you are a single parent and decide to name your child as the primary beneficiary on a life insurance policy. Your sister would then be in charge of financially managing the life insurance proceeds until your child reaches the age of majority. Parents do this because they might have a family member who is very good with money but not as good with children or vice versa.

When you list children as beneficiaries on your life insurance policy, consider whether you need both a personal guardian and a property guardian.

If you choose both options, the property guardian should be listed as custodian. Often, this person is either your parent, a sibling or close friend. If you have already had those important conversations with your family and designated this important person in your will, consider making them the contingent — or backup — beneficiary. The way this works is you would list your spouse or partner as the primary beneficiary on your policy and then the legal guardian as the contingent beneficiary.

The guardian will receive the money if all primary named beneficiaries are dead, either in a lump sum or in installments , and can use that money to raise your children into adulthood and provide for their future. Another way to avoid the potential challenges of naming a child as a beneficiary is to name a trust instead.

A revocable trust, also known as a living trust , is a popular estate planning tool that you can use to indicate who will receive your assets when you die. Assets held within a trust are commonly things like money, a house, life insurance, retirement plans and more.

A trustee manages the trust and ensures the correct individuals receive their benefits in the event of your death. You may also need to work with an attorney to ensure that all of your existing assets from various financial institutions are included in the trust. Knowing that you can work with a trustee to add or remove assets or make a change to beneficiary designations over time can give you peace of mind. Unlike revocable living trusts, an irrevocable trust cannot be adjusted after it is created unless you have permission from the beneficiary , so think carefully before you decide how your money and assets will be distributed.

Work with an attorney to set up a special needs trust and name the trust as beneficiary. A trustee you appoint will manage the money for the dependent's benefit. Here's more on life insurance planning for parents of children with special needs. However, in community-property states, your spouse typically would have to sign a form waiving rights to the money if you designate anyone else as beneficiary. Here are the community-property states:. Life insurance death benefits are generally tax-free -- except when three different people play the roles of policy owner, the insured, and the beneficiary.

In that case, the death benefit could count as a taxable gift to the beneficiary, says Amy Rose Herrick, a chartered financial consultant and life insurance agent with offices in the U. Virgin Islands and Tecumseh, KS.

For example, a wife owns a life insurance policy on her husband's life and names their adult daughter as beneficiary. The wife effectively is creating a gift of the policy proceeds to her daughter, Herrick says. The person who makes the gift -- the wife -- is the one who would be subject to the tax, if the amount of the gift exceeds federal limits. You could avoid the problem in most cases by having the husband own the policy, insuring himself.

However, the situation can get tricky in community-property states. Consult a financial adviser to decide the best way to structure the policy. Like life insurance, a will is important for securing your family's financial future.

Fill it out, making sure you include your life insurance policies. Listing your life insurance policies in your will can help loved ones to know that the coverage exists and can point them in the right direction in terms of collecting the benefit. That's why it's important to contact your insurer to change your beneficiary, if needed.

See more information on wills vs. Designating beneficiaries isn't something to do and then forget about, says Tara Reynolds, vice president at MassMutual. You should review your policy every three years and after major life events, such as marriage, having children or divorce.

Change the beneficiaries when circumstances change. Be specific when you name beneficiaries. The disadvantage of an UTMA is that the minor can receive the funds as soon as they become an adult — usually 18 years old — and financial responsibility and an year-old are not always synonymous.

According to New York Life, "A trust is a more detailed arrangement than a UTMA designation, and provides increased control over how assets can be used. For example, a trust can be established to receive and manage the life insurance proceeds on behalf of minor children or adult family members with special needs. In this situation, the trust is designated the beneficiary of the life insurance proceeds. The disadvantage to a trust is that it is more expensive to set up because you will need to hire an estates attorney.

Although setting up a trust is more expensive, it gives you more control over how the funds are spent and when your child gets access to the funds. Because you can select a bank or money manager as the trustee, there are additional safeguards in place to guard against misuse of funds. Most people who establish a life insurance trust for their children do not have their children receive full control until the child is 25 years old.

A trust can have the trustee pay for your child's education and living expenses. You can have the trustee pay a monthly stipend to the guardian.

You can have the trust administer a monthly allowance to your child when they become an adult instead of giving full access to the trust funds. The beauty is that you control how the assets are administered.

Remember the movie "Rain Man? As revenge, he decides to kidnap his special needs adult brother to control the funds. He didn't know that his father established a trust fund and a trustee managed all the funds.

This is the benefit of the trust. In case a relative decides to befriend your child for nefarious reasons, the funds are protected by the trustee. The intention of naming your minor child as your life insurance beneficiary is well placed, but it causes legal problems that can be avoided by utilizing a UTMA account or establishing a trust for your child and make the trust the beneficiary of your life insurance policy.

Disclosure: This post may highlight financial products and services that can help you make smarter decisions with your money.

We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners.

This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team. Read our editorial standards. For you. World globe An icon of the world globe, indicating different international options. Get the Insider App. Click here to learn more. A leading-edge research firm focused on digital transformation.

Good Subscriber Account active since Shortcuts. Account icon An icon in the shape of a person's head and shoulders. It often indicates a user profile. Log out. More Button Icon Circle with three vertical dots. It indicates a way to see more nav menu items inside the site menu by triggering the side menu to open and close.

Credit Cards Credit card reviews. Best credit cards Best rewards credit cards. Best cash back credit cards. Best airline credit cards. Best small business credit cards. Best balance transfer cards.

Best student credit cards. Best starter credit cards. The best online brokerages for beginners. The best investment apps. The best stock trading apps. Best robo advisors. Average stock market return.

Car insurance. Life insurance. Best cheap car insurance. Best life insurance companies. Best homeowners insurance.