Be careful not to designate minors as beneficiaries

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Most people want to pass their assets on to their children or grandchildren, but naming a minor as beneficiary can have unintended consequences. It is important to make a plan that does not involve leaving assets directly to a minor.

There are two main problems with designating a minor as the beneficiary of your estate plan, life insurance policy, or retirement account. The first is that a large sum of money cannot be bequeathed directly to a minor. Instead, a court will likely have to appoint a curator to hold and manage the money. Legal proceedings will cost your estate dearly, and the curator may not be someone you want to watch over your children’s money. Depending on the state, the curator may have to file annual accounts with the court, generating more costs and fees.

The other problem with designating a minor as a beneficiary is that the minor will be entitled to the curator’s funds when he or she turns 18 or 21, depending on state law. There are no limits to what the money is used for, so even if you want the money to go to college or for a down payment on a house, the child may have other ideas.

The way around these problems is to create a trust and name the minor as the beneficiary of the trust. A trust ensures that funds are protected by the trustee until such time as it makes sense to distribute them. Trusts are also flexible in the way they are written. The trust can state a number of details about who receives the property and when, including allowing you to distribute the funds at a specific age or based on a specific event, such as graduation from college. You can also spread distributions over time to children and grandchildren.

If you are creating a trust, remember to name the trust as the beneficiary of any life insurance or pension plan. If you forget to take this step, the money will be distributed directly to the miner, thus negating the work of creating the trust.

To create a trust, consult your lawyer.

Last modification: 07/27/2021

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