Estate planning is both a complex and emotional legal field. It’s critical to seek out legal advice when you’re still young and healthy should anything happen to you. You want to be certain your loved ones will be provided for in the event of your passing, and there are even more considerations to make when you still have minor children.
You may naturally wonder if you can have a minor beneficiary in your will and/or trust, and the answer can quickly become complicated. Read on to learn more.
Can a Minor Be a Beneficiary?
While you can give a minor a beneficiary designation, it’s important to note that under most circumstances, a young child won’t be able to receive any assets and can’t enter into legal agreements until they’re adults.
Many parents decide to name a minor child as a beneficiary, believing they’ll age into adulthood by the time they themselves pass away. If this happens, there would be no issues. Sadly, anything can happen, and most legal documents will prevent a minor from receiving the assets until they’re at least 18 years old.
When it comes to estate planning, there are four primary documents to be aware of that one can name beneficiaries to.
- Will: The beneficiary receives assets directly from your estate.
- Retirement Account: The beneficiary receives any assets within the account upon the individuals death.
- Life Insurance: The beneficiary receives a payout from the life insurance benefits once the policyholder dies.
- Trust: The beneficiary receives any assets from the trust as laid out by the terms.
With these documents, a minor could only be a feasible beneficiary within a trust. This is due to the fact that the trustor can lay out terms of when and how a beneficiary can receive any assets. For example, you could state how the beneficiary cannot receive money and property until they’re 18th birthday, which is when the state of Florida considers someone an adult. There could also be additional terms, such as how money from the trust can go toward paying university tuition, and any children can’t receive additional assets until they graduate from college.
In the event a minor is set to receive assets from a will, retirement account, or life insurance policy, any assets will need to be hold by an outside entity. Usually, this is whoever the child’s legal guardian is, and the process will be approved by a probate court. It’s also possible for any money to go into a custodial account, which the legal guardian oversees until the child reaches the age of majority. In either case, it creates additional steps that could be circumvented through a trust.
Consequences of Minors as Beneficiaries
The primary consequence of naming a minor as a beneficiary is that there can be steep financial burdens. For example, a minor can’t receive a life insurance payout, meaning they’ll have to go through probate court where a legal guardian will be designated to oversee the money until the child is 18.
Probate can be a costly and time-consuming process, and it’s possible the court will appoint someone to be a guardian you don’t want in charge of all that money. This is why it’s also crucial to establish a legal guardian you trust outside of another parent, just in case something happened to both of you.
There’s also money a minor can receive through an IRA account that they’ll be unable to access until they’re the age of majority. You may want a child to have access to that money earlier, further creating complications.
Plus, if funds go into a custodial account, it’s possible they’ll be subject to a “kiddie tax.” This is a tax levied against any income or investments owned by a child, meaning they could lose a substantial portion to the government right away.
Ultimately, an adult child gaining access to a lot of money isn’t as dubious as a minor. There could be concerns whether someone not of legal age is mature enough to handle receiving such a large amount of money, so your best option regardless may be to establish a trust with an experienced estate planning attorney by your side.
Options to Avoid Naming a Minor as a Beneficiary
The safest option to ensure your children receive as much money as possible from your estate is to set up a trust. You’ll put a trusted adult to oversee the account, and they’ll be in charge of divvying out the assets based on your wishes. For instance, you may want your children to receive a certain amount of money every month so that they don’t get a large sum all at once.
There are two specific types of trusts to consider when you have minor children, each one allowing you to leave behind certain assets.
- The Uniform Transfers to Minors Act (UTMA): A tax-advantaged system to leave behind most assets to a minor child, with a guardian overseeing the account until the child is of age. UTMA can support numerous types of assets, including cash, stocks, bonds, life insurance policies, real estate, intellectual property rights, fine art, jewelry, vehicles, royalties, and exchange-traded funds.
- The Uniform Gifts to Minors Act (UGMA): This also allows you to more easily leave assets to minors, but it’s more limited in scope. UGMA accounts leave behind irrevocable gifts to minors, which include cash, stocks, bonds, mutual funds, and insurance policies.
Through any type of trust, you can name an overseer who will ensure the proper distribution of assets. This is a viable way to ensure your children still benefit from what you leave behind, as you can provide detailed instructions on how money can be used until it goes to the children. The primary beneficiary could be an adult, but they have instructions on using funds to pay for children’s food, school supplies, and other essentials.
How to Protect Children With Special Needs
Children with special needs may require special attention throughout the rest of their lives. They may not be able to care for themselves, but the care they receive isn’t free. A trust ensures that the child will have financial resources available to them as financial support even into adulthood. A parent can allow a sibling or another trusted guardian to oversee the money with conditions.
What to Know About IRA Accounts
An individual retirement account is a personal savings account with tax benefits. These are self-managed and self-funded, and they work slightly differently when trying to pass them onto a beneficiary. As outlined by the SECURE Act, a minor can’t take assets from the IRA until the accountholder has passed away.
Once the minor is 18, they have 10 years to withdraw all of the assets. The beneficiary can either sell the account to receive the money outright or transfer assets into a different portfolio.
Talk to Your Children About Estate Planning
Educating your children about financial responsibility is always a good idea once they’re of an age where they can understand such concepts. Ultimately, you just need to lay out how you’ll provide for them in the future and assuage any fears they may have about your death. There are even ways your children can help you with estate planning.
- Outside of parents, talk to your kids if there’s anyone they would or wouldn’t want to have as a legal guardian. Is there anyone your children don’t trust or feel safe around?
- Work through any misunderstandings. You don’t want your child to be surprised about how much (or how little) they receive from a trust or will.
- Get your children involved in the process. You could even introduce them to your attorney so that they know who they can turn to should the time come.
This discussion doesn’t just benefit your retirement plans. It fosters open communication and may make your kids realize they can talk with you about anything.
Choose an Experienced Estate Planning Attorney for Peace of Mind
Determining a life insurance beneficiary or establishing a living trust aren’t easy. Not only is there a ton of legal jargon to sort through, but the process also involves coming to terms with your own mortality. Fortunately, Medley Law Firm is here to help. We can help you evaluate all your options and consider every alternative, especially if you presently have minor children.
Medley Law Firm understands the ins and outs of state law, so we’ll work to ensure all documentation is enforceable within Florida. And we’re more than happy to answer any lingering questions you might have. Speak to a lawyer today so that you can feel confident in your children’s futures.