What To Avoid When Naming A Minor Child Your Beneficiary
There are several approaches which you should not take when considering minor children as these options can be costly and problematic.
Name A Property Guardian In Your Will
If you wish, you can simply use your will to name a property guardian for your child. Then, if at your death your child needs the guardian, the court will appoint the person you chose as property guardian. The property guardian will manage whatever property the child inherits, from you or others, if there’s no mechanism to handle it.
Set Up A ‘pot Trust’ For Your Children
If you have young children, you may want to set up just one trust for all of them. This arrangement is often called a pot or family trust. In your will or living trust, you authorize the trust and appoint a trustee, who will have the power to dole out trust money to each of the children. The trustee doesn’t have to spend the same amount on each child; instead, the trustee decides what each child needs. When the youngest child reaches a certain age, usually 18, the trust ends.
A pot trust gives great flexibility to the trustee. Its major drawback is that the older children can’t receive their shares of the trust property until the youngest child turns 18; they may not get control over their inheritance until they are well into adulthood.
Nick and Nora have three children, ages 4, 5, and 10. In their wills, Nick and Nora each leave everything to each other, and name the children as alternates. If both parents die and the children inherit everything, Nick and Nora’s wills provide that one pot trust will be set up for all the property. The trustee, Nora’s sister ChloÃ«, will be responsible for managing the assets in the trust and spending trust money for the children in whatever amounts she decides are necessary.
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Creating A Trust Is A Great Second Option
Although there are lawyer costs when creating a trust a trust gives you the most control and it can avoid the probate process. A trust can hold many assets including life insurance. You name the trust the beneficiary of the policy and when you die the death benefit goes into the trust.
You name a trustee to manage the death benefit money on your childrens behalf and then the trustee must act based on the terms of the trust. In these terms you can specify exactly when your children receive the death benefit, how much they can receive at one time, and even how the money is to be used.
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Special Needs Children And Other Dependents
For any children or other dependents who may be unable to care for themselves as adults, you’ll want to make special arrangements to ensure they have the care and oversight they need indefinitely. Life insurance may help ensure they have the necessary funds if they are unable to make a living for themselves.
For other aspects of their care, many options and combinations of options, up to full legal guardianship, are available to balance the individual’s autonomy and best interests. An attorney with experience in this area can help you make the best choices for your situation.
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Naming A Beneficiary Who Is Under Legal Age
If the beneficiary you name is under the legal age when you die, you may want to set up a trust and designate a trustee or administrator. This person can hold the proceeds of the death benefit in trust on behalf of the minor.
If you don’t name a trustee or administrator, the death benefit, plus any interest it earns, will be held in trust by the province or territory. It will be paid out when your beneficiary reaches legal age. Consult with a lawyer or financial advisor for more details.
Who To Choose As Your Life Insurance Beneficiary
If you simply want to ensure your family are financially cared for in the event of your death, you may want to name your spouse or partner as the beneficiary. Your surviving partner can then use the funds acquired from your policy to cover household bills, keep up mortgage repayments and maintain the support of your children.
If your primary reason;for life insurance cover is to ensure your young children are provided for either with their education or in later life you can establish a trust. When a policy is ‘Written in Trust’ in the event of your death the sum will be paid straight into this trust instead of going to probate like the rest of your estate. This is one way in which you can side step this sum of money being part of the sum of your estate which is subjected to inheritance tax. Once your child comes of age they will be able to take control of the money. It may be worth noting though, life insurance policies ‘written in trust’ means your partner won’t be able to use the funds to care for your child/children. If your intention is for your partner to use the money to care for the children naming your child/children as beneficiaries in this way may not be the best avenue.
If you are a parent;to adult children you may want to name them as well as any grandchildren you may have as beneficiaries. This may allow you to fulfil a dream of leaving your own legacy for your family. Giving them the funds to do something they have always wanted to do.
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What Type Of Life Insurance Should You Buy
Avoid expensive cash value life insurance policies that offer a lump-sum payment after a certain period of time or after you reach a certain age . This lump-sum payment is sold as a long-term savings/investment feature and it does nothing to affect how much money will be available to your child if you die in the next few years.
If you’re reasonably young and healthy, consider purchasing a moderate amount of term insurance, which is the cheapest form of life insurance. Younger parents can obtain a significant amount of coverage for relatively low cost, for the obvious reason that statistically they are unlikely to die soon, so the risk to the insurance company is lower. It will provide quick cash for your children, if necessary, without draining your bank account now.
Can Anyone Be Named As A Beneficiary
Your beneficiary can be a person, a charity, a trust, or your estate.
Almost any person can be named as a beneficiary, although your state of residence or the provider of your benefits may restrict who you can name as a beneficiary.
Make sure you research your states laws before naming your beneficiary. If you are a resident of certain states, you may be required to list your spouse as your primary beneficiary and designate him or her to receive at least 50 percent of the benefit. In some states, you can name someone else with your spouses written permission.
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You Should Include Specifics In Your Policy
When you write your life insurance policy you want to be as specific as possible about your children, including their full names, Social Security numbers and where they live because you want the insurance company to build easily find them in the event that they have money to pay them. Only listing your children by their first name probably isnt going to preclude them from receiving their proceeds but it could make the insurance company have difficulty in finding them and this could delay payments by a great deal.
What Is A Life Insurance Beneficiary
A life insurance beneficiary is a person who receives a payout from the policy if you die. Choosing your beneficiary is important, as this is the person who is in line to receive the entire death benefit from the life insurance coverage.
Your beneficiary likely was one of the primary reasons you got life insurance in the first place. However, choosing one isn’t as simple as you might thinkstate laws and policy rules can impact who you choose to leave your death benefit to.
As a rule of thumb, you should always check the fine print on the terms and conditions with the provider before putting anything down in ink. That way, you can be confident over who is the beneficiary, so there are no complications when it comes to who receives the death benefit.
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Dependents And Minors: Whats The Difference
A minor is someone whose age is less than the age of majority. Remember that the age of majority is determined by each state, but is typically 18-21. A dependent is a person who has to rely on you for financial support and care.
Look at it this way:
- Everyone who is a minor is also a dependent.
- However, not all dependents will be a minor.
Make sure that you buy enough life insurance to cover every one of your dependents no matter if they are a child, an adult or someone with special needs.
Naming Your Estate As A Life Insurance Beneficiary
Instead of naming your children as beneficiaries of your life insurance policy, you can name your estate. The problem with this option is that the money will not be immediately available to your children due to the fact your estate may go into a lengthy probate process after your death, during which time your children could be without financial support.
Life insurance companies tend to pay out claims pretty quickly, within a couple of weeks. But if you name your estate as the beneficiary, the money goes into your estate, which, after your death, is held by the probate court. Your estate, in turn, is then distributed according to your willor, if you die without a will, according to state laws. Your estate’s debts are paid first, before any money goes to your beneficiaries, so it is possible some of the life insurance proceeds could be used for this.
Additionally, if you make the policy payable to the estate, the amount of the payout is then subject to estate taxes. Life insurance, on the other hand, is not taxable when paid directly to beneficiaries.
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Irrevocable Vs Revocable Beneficiaries
You cannot change an irrevocable life insurance beneficiary designation without the beneficiarys approval. For this reason, irrevocable designations aren’t common. However, they can be useful if you want to guarantee the death benefit reaches a specific person, such as your child.
In contrast, a revocable life insurance beneficiary designation is flexible. You can change, update, add or remove a revocable beneficiary at any time. This grants you the freedom to update your designation to match your current needs.
Can A Life Insurance Beneficiary Be A Minor
It is perfectly natural for a parent to want to name their children as beneficiaries of their life insurance policy but there are several considerations when naming a minor as the recipient of a life insurance payout. Understanding and navigating that jungle is the key to making sure that the money goes to the right person in the event of your death. There are twelve things that you should be aware of if you are considering making your life insurance beneficiary a minor.
There are ways to get the payout of a life insurance policy to your child, and those are explained here. ;Remember that you should always check with your life insurance company, a financial advisor, and possibly a tax advisor before making any decisions about naming your child as the beneficiary of a life insurance policy.
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Tips For Naming A Beneficiary
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An important part of owning life insurance and other financial products is designating your beneficiaries the people or entities who receive the benefits from your policy or accounts when you die.
Choosing who will receive your assets or the payout from your life insurance policies is a decision you should consider carefully, because a beneficiary designation cant be changed or corrected after youre gone.
It’s important to keep you beneficiary designations up to date as your life changes . Here is some basic beneficiary information that may help.
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 childrens 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 trustbased plan will allow you to do so without court involvement.
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Name A Guardian As A Contingent Beneficiary
If youre not 100 percent sure about naming your child as a beneficiary on your insurance policy, consider naming the childs guardian.
When you create a will, its best practice to indicate who would be the legal guardian of your children if something happened to you and/or your partner. 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.
Choosing A Life Insurance Beneficiary
Aside from minors, insurers dont have rules on who you name as a beneficiary. In addition, life insurance beneficiaries are completely separate from those in your will, so the two lists dont need to overlap, though they certainly can.
A beneficiary can be a person, charity, business or trust. If the beneficiary is a person, they can be a relative, child, spouse, friend or anyone else you happen to know. As some agents like to say, you can even name your “secret lover” as a life insurance beneficiary.
The only restriction is if youre married and live in a common property state, also called community property states. There are 9 common property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In these states, there are usually life insurance beneficiary rules that require your spouse to waive their rights if you want to designate someone else as a beneficiary.
While its not a legal or insurer restriction, we recommend that the policy owner, person insured and beneficiary are not all separate entities. This is because the IRS might view any proceeds from the death of the person insured as a gift from the policy owner to the beneficiary, meaning they can be taxed.
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Life Insurance Beneficiary: A Complete Guide
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Primary And Contingent Beneficiaries
There are two types of beneficiaries: primary and contingent.
A primary beneficiary is the person first in line to receive the death benefit from your life insurance policy typically your spouse, children or other family members.
In the event your primary beneficiary dies before or at the same time as you, most policies also allow you to name at least one backup beneficiary, called a secondary or contingent beneficiary. If the primary beneficiaries are all deceased, the secondary beneficiaries receive the death benefit.
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