Minor Children as Life Insurance Beneficiaries
DO NOT NAME YOUR MINOR CHILDREN AS BENEFICIARIES ON LIFE INSURANCE POLICIES. The failure to have a proper estate plan can cause many different problems for minor child and surviving family members. Too often parents will designate their minor children as contingent beneficiaries on life insurance policies and retirement accounts.
Insurance Money Cannot be Turned over to a Minor Child
The law of Pennsylvania prevents a brokerage house or insurance company from turning over money to a minor child.
The best way to explain this is by way of example. Assume that you have a Mother and Father with two minor children, ages 5 and 10. The parents have not prepared or executed a Last Will and Testament. The parents are involved in an automobile accident and unfortunately both parents pass away. Father has a life insurance policy with a death benefit of $200,000.00. Father named his spouse as the primary beneficiary and his two children as contingent beneficiaries.
Using this example above, the insurance company would be obligated to pay $200,000.00 to the children given that the primary beneficiary had passed away. Given that the children are under age 18, the insurance company is required to turn this money over to the Court for establishment of a guardianship account.
Court Appointed Guardian
The Court would appoint a guardian to be in charge of the money for the minor children. This money would be held in a guardianship account. The guardian may be a family member but it can also be an Attorney or Accountant appointed by the Court. There would be significant restrictions on how the money could be invested and typically the funds are placed into a savings account at a bank.
There would also be restrictions on how the money could be withdrawn from this account. The Court is concerned primarily with preserving the money for the minor children until they attain the age of 18 years. Each year the guardian will be required to report to the Court as to any and all activity on the accounts.
The Expenses of Reporting to the Court
This process of reporting to the Court can become rather expensive and the fees for doing so are taken from the children's account.
When the minor children attain the age of 18 years, the guardianship account is closed and a check is given to the 18 year old child. This is perhaps the most significant problem with not having a proper estate plan. Most children who are eighteen years of age would be ill-prepared to handle any amount of money and under this circumstance they would be provided with their entire share of the estate.
Solving the Problem with a Minor's Trust
The Minor's Trust would be established to appoint a trusted family member to be the Trustee to manage the money for the minor children. Instructions can be given to the Trustee as to how this money can be used for the minor children and it can also provide instructions to hold onto the money even after the children turn age 18.
For example, a common Minor's Trust provision would include the Trustee having the ability to pay for the health, support and maintenance of the minor children at the discretion of the Trustee. Typically there is also a provision that provides for the distribution of the balance of the trust over a period of time, for example, 1/3 at age 21, 1/3 at age 24, and 1/3 at age 28.
By setting up this Minor's Trust, the Court is not involved in the management and distribution of the funds and more importantly, the minor child does not receive the entire balance of the account at age 18 but instead, it is distributed over time at a more mature age.
The death of parents with minor children is a terrible event. The minor children will have to learn to deal and cope with the loss of both of their parents. Without the parents having a proper estate plan in place, this process becomes even more difficult for the minor children. For this reason, it is very important that all young parents have a proper estate plan in place.
If you are interested in scheduling an appointment to discuss issues pertaining to minor children and estate planning or to prepare estate planning documents, please call our office at 724-836-3300 or try our easy to use online contact form.