Planning When Minor Children Are InvolvedGo to Top
I co-authored this blog post and think it is pretty important so thought I would share. This was written in response to a real client situation.
Oops! I Didn’t Think I’d Die So Soon.
It is not uncommon for clients to want their minor children (or grandchildren) to share in the death benefits under their life insurance policies or annuities, either as primary or contingent beneficiaries. Simply to name the minor children as direct beneficiaries, however, can cause nothing but problems … that is, if the insured or annuitant dies too soon, when the children are still under age. Why? Because minors are both legally and practically incapable of managing large sums of money, meaning that some responsible adult needs to be appointed to do that for them. This can be an expensive, cumbersome, restrictive, and time-consuming process.
There are right ways to accomplish a client’s objectives in this regard and there are wrong ways. Unfortunately, all too many policies are written with this accomplished the wrong way, with the minors simply named as direct beneficiaries. The best way to accomplish what the client wants here is for the client to have a living trust (or at least a will that creates a testamentary trust for minor children) that covers all of their estate assets, and to name the living trust (or testamentary trust) as the beneficiary of the death benefit proceeds for the children’s benefit.
I bet you’re saying to yourself, “He’s got to be kidding! Practically none of my clients have either a will or a living trust!” Well, you’re probably right, but there is another sound way to solve this problem, all the while encouraging your clients to do some real planning. I strongly urge you in these situations to name the minor children as beneficiaries (preferably as a group, not by individual names, in case another child comes along) and to use the following language:
“Children of the insured in equal shares per stirpes; provided, however, if any beneficiary is under age 25, that beneficiary’s share shall be paid to (name of desired responsible adult) as Custodian for that beneficiary until age 25 under the (name of state) Uniform Transfers to Minors Act; Successor Custodian: (name of alternate desired responsible adult).”
Comments: (1) “per stirpes” means that if a child has died leaving issue, those issue will take the deceased child’s share “by right of representation”. (2) For death-time transfers, most states’ laws permit the Custodianship to last until age 25, but your own state’s law should be checked in this regard; of course, an earlier age can always be specified if desired. (3) Most states have adopted the Uniform Transfers to Minors Act, but some may still have a Uniform Gifts to Minors Act, which would have slightly different provisions; again, your own state’s law should be checked. (4) Consider how important this suggestion is when the insured is divorced and in no way wants the ex-spouse to have any control of the policy death benefit proceeds.
Re: Planning When Minor Children Are InvolvedGo to Top
I think the thing most often overlooked issue about minor children, who are orphaned by the deaths of both parents, is how to fund the day to day costs of raising the children by guardians.
If you establish a trust for the child, then the objective of the trust is to preserve the funds in the trust, for the child, UNTIL they reach the age specified (such as 25).
OK, so who pays for the food, clothing, education, housing, etc., until the child is an adult. Do you expect the godparents to do that out of their own pocket?
When we still had minor children, my wife and I dealt with that by establishing two trusts in the event of our death. One trust was for the children, and the other trust was to pay an annual salary to the guardians of the children in order to take care of the costs associated with raising the kids.
I then implemented a formula which specified how much would be paid out of the guardian trust each year, per child, in order to preserve the money and to provide a way to address inflation.
I found both lawyers who did our wills through the years, one in Canada and then one if the U.S., liked the idea/concept a great deal. In fact my lawyer in Canada, who had minor children, advised me that he put the same language he created for me, in his own will.
Re: Planning When Minor Children Are InvolvedGo to Top
Originally Posted by Robert Barney
I think the thing most often overlooked issue about minor children, who are orphaned by the deaths of both parents, is how to fund the day to day costs of raising the children by guardians.
If you establish a trust for the child, then the objective of the trust is to preserve the funds in the trust, for the child, UNTIL they reach the age specified (such as 25).
OK, so who pays for the food, clothing, education, housing, etc., until the child is an adult. Do you expect the godparents to do that out of their own pocket?
When we still had minor children, my wife and I dealt with that by establishing two trusts in the event of our death. One trust was for the children, and the other trust was to pay an annual salary to the guardians of the children in order to take care of the costs associated with raising the kids.
I then implemented a formula which specified how much would be paid out of the guardian trust each year, per child, in order to preserve the money and to provide a way to address inflation.
I found both lawyers who did our wills through the years, one in Canada and then one if the U.S., liked the idea/concept a great deal. In fact my lawyer in Canada, who had minor children, advised me that he put the same language he created for me, in his own will.
Planning When Minor Children Are Involved
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