During a previous bulletin (click here
to read), we discussed the downsides to naming a child (under age 19) as a direct beneficiary of a life insurance policy
. Most significantly, the proceeds must be paid to the Public Guardian and Trustee’s office to hold, and then turned over to the child when he/she comes of age.
Option 1: Naming a Trustee to receive and hold proceeds
Many of our readers sent follow-up comments about the commonly utilized tool of directly naming a Trustee to hold the insurance proceeds on behalf of the child
, which is done on the policy documents. Upon receiving the proceeds after the death of the insured, the named Trustee opens a trust account, and distributes cash to the guardian or pays expenses for the minor, all at the Trustee’s discretion. What remains of the funds is paid over to the child when he/she reaches age 19, with no strings attached.
We recommend that this approach be used, at a bare minimum, in all cases where beneficiaries of life insurance are minors.
If, however, clients want to postpone distribution until the child is much older than 19, this can only be achieved by using a Life Insurance Trust.
Option 2: Life Insurance Trusts
This “Cadillac” option looks like this: the client, during his/her lifetime, establishes and signs a formal Life Insurance Trust, which names a Trustee and sets out a schedule for distribution, which usually calls for the trust to end when the child is much older than 19. Due, perhaps in part, to a trend of children taking longer to become financially savvy, we find that when given the opportunity parents often elect to postpone the distribution date to age 25, or even 30, depending on the amount of money involved.
Furthermore, we are frequently drafting trusts that require
the Trustee to pay lump sums to the child on certain birthdays (eg., 25% at age 25, another 25% at age 27, the balance at age 30). In this manner, parents are able to spread the amount out over a longer period, hopefully allowing their children to develop ideal money management habits over time, without turning over the whole amount at once.