Why You Shouldn't Name a Minor Child as Your Beneficiary

Continuing with September as National Life Insurance Awareness month… One of the main reasons people have life insurance is because they have young kids. Often, people think that they should name their spouse as the primary beneficiary and then the kids as contingents (if something happens to both parents). This blog talks about why this may not be a great idea.

So, what happens if you name your child as a beneficiary, and they inherit as a minor (under age 18)?

When you open any investment or retirement account or have a life insurance policy, you will be asked to provide a beneficiary. A beneficiary is a fancy word for “someone who gets your money when you die.”

If you are married, retirement accounts (like 401(k)s) require you (by law) to name your spouse unless the spouse gives permission for you to name someone else. For example, if are in a second marriage and are both financially stable, you may want to name your kids from an earlier marriage as your primary beneficiary—then your current spouse would have to approve and sign off.

You can then name someone else as a contingent beneficiary, meaning, if something should happen to you and your primary beneficiary, it names someone else who inherits.

My typical joke is, if you are parents, please don’t die together; it makes it very difficult on the children. But seriously, it is important to think about these things if you are parents, even though nobody wants to talk about their death.

If you and your primary beneficiary both pass and your minor child is named as a beneficiary, note the following:

Minors cannot inherit money outright, and for good reason. Nobody wants to give a 7‐year‐old a large bank account. If you name them and they inherit, then a court will appoint a guardian to manage these funds (called a conservator) until your child reaches legal age (typically age 18).
The funds then go into a special type of account called a conservatorship. The court requires an attorney to oversee the annual process (which requires paying attorney fees) to account for needs that must be filed with the court (requiring court costs). Thus, all of this takes time and money.
Once your child turns 18 (or 21 in some states) the money is theirs to use as they please.

Ok. What are my other options?

Name a trusted adult. If you are confident that your parent or sibling will absolutely guarantee that this money is used for the kids, and only the kids, then go ahead and name them.
Consider a trust. If you set up a trust with an attorney, then you can name the trust as your beneficiary, and whatever the trust says goes. So, in the trust, you can name people who will take care of your children and separate people who will manage your money, if you so desire. You can also specify that the money remain tied up in the trust for as long as you want. For instance, if you want your kids to inherit the money outright when they are 30, that’s something you can do. The trust can also designate what the money is to be used for.

You may want to consult an attorney before enacting any of these changes.

Any opinions are those of Jill Carr and not necessarily those of RJFS or Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.