One common mistake made in estate planning is naming a minor child as your insurance beneficiary. All states prohibit a minor child from acquiring insurance funds directly. In the absence of a trust and clear instructions, the probate court will appoint a guardian for your child after your death to manage the funds on your child's behalf. You will you have no control over who is appointed guardian, and the court expenses will be paid from the insurance funds, lowering the amount of money available to care for your child. Setting up a trust to deal with insurance funds can prevent this situation.
Trustee
The most important advantage to setting up a trust is that you have the opportunity to choose the trustee---the person who will become responsible for handling the insurance funds in the event of your passing. The trustee must manage the funds according to your wishes, as expressed in the trust for your child's well-being. Before selecting the trustee, carefully discuss these responsibilities and your wishes for use of the funds for your child. For example, you may decide to keep the trust in effect even after your child reaches age 18 so as not to put a large sum of money in your child's possession when he may not yet have the maturity to handle the funds. Discuss these factors with your intended trustee to ensure he will accept the responsibility and follow your desires.
Trust Document
Carefully prepare and review your trust document with your attorney. Since trust law is complex, it's important to hire an attorney who specializes in estate planning. Let your attorney know that you intend to use the proceeds from your life insurance policy to fund the trust, and provide the attorney with the name of your trustee and specific information about what you desire regarding use of the funds and when the funds are to be distributed to your child. Your attorney may want to include an alternate trustee in the trust document in the event that your first choice for trustee cannot carry out the responsibilities.
Life Insurance Policy
After your trust document is completed, purchase a life insurance policy and identify the trustee as the policy's beneficiary. To properly designate the beneficiary, include after the trustee's name the following: "as trustee of [the name of your trust]." At the point the insurance carrier needs to tender the funds, this designation will insure that the funds are intended for your trust, not for your trustee individually.
Uniform Transfers to Minors Act
In some states, you may have a simplified alternative to setting up your own trust document. If your state has enacted a version of the Uniform Transfers to Minors Act, or UTMA, you can name the same person you intend as your trustee as custodian for the funds. For example, California Probate Code Section 3903 states that you have the right to nominate a custodian to receive property for a minor beneficiary by using the following words after the custodian's name: "as custodian for [name of minor child] under the California Uniform Transfers to Minors Act." This approach will save you the expense of setting up a trust.
Member Comments