Your kiddos…you love them but are you ready to hand over a huge chunk of cash when they turn 18?
Although some parents do, the majority would likely tell you that they are not comfortable with their children having access to a large sum of money. At least until the parents know that their child is responsible with their money.
If that is the case, then why do so many parents list their minor children as contingent beneficiaries on annuities, life insurance, and retirement accounts?
There is no doubt that the ability to name beneficiaries is a terrific benefit. Why? Accounts with a beneficiary will generally bypass the sometimes long and costly probate process. So when the account owner dies, the assets go directly to the beneficiaries named on the accounts. However, when dealing with young children as beneficiaries, it is important to realize that the children receive the rights to those assets with no strings attached at some point between the ages of 18 and 21 (depending on your state law).
Let’s look at an example:
Let’s say the breadwinner of the family has a $1 million dollar life insurance policy that lists the spouse as the primary beneficiary and his/her 15-year old son as the secondary beneficiary. The spouse also has a $500,000 life insurance policy that lists the breadwinner as the primary beneficiary and the son as the contingent beneficiary. Both spouses die in a car crash together leaving the son with $1.5 million, of which he gains full control of the balance (money not spent) at age 18.
Many parents are not comfortable with their children having that type of money at that age. So what are some possible solutions?
One is to establish a testamentary trust for the benefit of the child through the wills of the parents and to list the trust as the contingent beneficiary of the life insurance. Because the trust is created at death, the assets will likely still pass through probate, but the parents can select a trustee and provide instructions on how the assets of the trust will be disseminated to the child.
Another possibility is to establish a living trust prior to death with the child as the beneficiary and list the trust as the contingent beneficiary on the life insurance. This arrangement should avoid probate but will incur the costs of setting up and maintaining the trust.
Each family is different, but everyone with children needs to address how assets will pass to heirs.
A good financial advisor, estate planning attorney, and tax accountant can work together to develop a plan to meet your specific goals.
For additional reading, check out IRA BENEFICIARY DESIGNATIONS – WHAT YOU NEED TO KNOW
Ryan Edwards is a financial planner in Shreveport, LA, who enjoys working with young professionals desiring to plan for their futures. He holds the CERTIFIED FINANCIAL PLANNERTM (CFP®) designation and can be found online at http://www.cornerstoneshreveport.com/team/ryan-edwards.