Don’t Make This Life Insurance Mistake
We often see people naming young children as beneficiaries on Life Insurance policies. This is a big 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, then 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 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 the age of 18 years, what ends up happening is the funds are 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 turns 18 and they are legally an adult, they will be handed over the entire sum and the guardianship will end.
This is a mistake because an 18 year old will inherit or receives and entire lump sum on their birthday. Imagine an 18 year old in your life, and now image that 18 year old being handed an account with $500,000 right when they turn 18 or worse a $1,000,000. The parents do not have control over the account
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.
Let’s say John and Sally are married, they have two young kids, and they 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.
Feel free to contact our office for a free consultation. Together we can sit down and put together 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.