We often see people naming young children as beneficiaries on Life Insurance policies. This is a big life insurance mistake for residents of California.
Most of the time, it is a parent who makes this life insurance mistake. The parent will name their spouse (if any) as a primary beneficiary. They will name their children as a secondary beneficiary. Sometimes grandparents will name their children as beneficiaries and name a grandchild that’s under the age of 18 as a backup beneficiary.
Why Is This A Life Insurance Mistake?
In the Estate Planning world, this is a big mistake for the minor child because of the legal consequences. Because the beneficiary is under 18 years, the funds will be held by the life insurance company until a court order is obtained. They will not release that money to an under age child. Instead, they will ask for what’s called a “Guardianship Order” to be set up through the Probate court system. In a nutshell, they will ask the family to go to court and get a judge to okay that they give the money to the Guardian. When the child is legally an adult, they will receive the entire sum and the guardianship will end.
This is a mistake because an 18 year old will inherit or receive an entire lump sum on their birthday. Imagine an 18 year old in your life being handed an account with $500,000, or worse a $1,000,000. The parents do not have control over the account. You see why this is a big life insurance mistake for California residents.
In addition, the guardianship process is extremely expensive. We don’t want to go through that process just to transfer the money from the Life Insurance company to the minor child when there are less expensive legal alternatives available.
What Are The Legal Alternatives
Instead of naming that child directly, you should create a Trust and name the Trust as beneficiary of the Life Insurance policy. This will allow the person to control how the child receives the sums and at what ages or conditions.
Example:
Let’s say John and Sally are married, have two young kids, and buy a life insurance policy. They name each other as beneficiary and then instead of naming their children, they name their trust as a beneficiary of the life insurance policy. If they both pass away, that money will actually flow into the Trust. Within the trust agreement, they have decided on all provisions related to the children, like how the kids will use the money, when they will use it, at what age they receive their inheritance and who will control the sums for the children.
If you’re a California resident, feel free to contact our office for a free consultation. Together we can sit down and craft a plan that will make sure we take everyone’s hands out of your kids money pot. We can eliminate the need for a judge’s intervention and a court’s involvement.
