In a prior post, we discussed some of the problems that can arise when children are named as life insurance beneficiaries. This post discusses options for parents who want to ensure their children receive life insurance proceeds but want more control over when children can access the funds and for what the funds can be used.
A Parent or Guardian Must Manage a Child’s Finances
Minor children cannot legally manage their own financial affairs. That is the responsibility of parents until children turn 18. If the parents die, states require appointment of a custodian of the property or a custodian of the estate, who acts as the minor’s fiduciary and manages the finances of the child. Guardianships over property end when the minor turns 18. At that time, all remaining money is turned over to the youth.
Uniform Transfer to Minors Act
The Uniform Transfer to Minors Act (UTMA) is a way to postpone giving a child control of financial assets until he or she has turned 21 or older, in some states. When a UTMA is established, a custodian is named to manage the assets until the custodianship ends. The UTMA has been adopted in every state except South Carolina and Vermont, and each state defines the age at which the UTMA custodianship ends. In most states, it ends when the child turns 21, but in some states custodianship can remain in effect until the child turns 25. In a few situations, custodianship could end at age 18.
Enforceable restrictions cannot be placed on the use of UTMA funds. The funds are the property of the minor and when the minor grows up and the custodianship ends, the youth can use the money in any way he or she chooses. The custodian is a fiduciary and must use the assets for the benefit of the minor, but the parent cannot place specific restrictions on the funds. The accounting requirements are less stringent than for a guardianship of the property, but the custodian still must account for the funds.
Trust Funds or Trust Accounts
When parents want more control over the use of money left to their children through life insurance policies, they should consult a life insurance lawyer about setting up a trust for the minor children who are to receive the proceeds of the life insurance. Establishing a trust allows the parents to name the trustee, designate how much money is to be used for what purposes, and control what amounts of money are distributed to the children at specific age intervals.
A trust allows money to be distributed to children much longer into their adulthood, and distributions can be tied to triggering events such as college graduation, acceptance into graduate school, or marriage. Since most parents provide some level of financial support to their children long after age 18, a trust better approximates the longevity of support the parents would have provided had they lived.
The experienced life insurance lawyers at Boonswang Law can help parents explore the best ways to ensure that their life insurance proceeds accomplish their intended purpose—providing financial security for their children through adulthood. Contact Boonswang Law today for a free consultation regarding your life insurance questions.