Minors Named as Beneficiaries

By Barry Boscoe, CFP

Oftentimes it is desirable to name the child as a direct beneficiary of the life insurance policy on the life of the parent.  This may be done to avoid having to set up a trust or due to the fact that the parent is a single parent.  If the child is a minor, this could cause unexpected headaches down the road.

Generally, naming a child as a direct beneficiary of a life insurance policy is not a problem, particularly in cases without estate tax issues, as long as the child is an adult.  However, if the client dies while the child is still a minor, the death benefit often cannot be paid directly to the minor.

In some states, the proceeds of the life insurance policy with the minor named as beneficiary must be paid to a “conservator,” sometimes referred to as a guardian for the minor.  The conservator will be responsible for the financial assets that the minor owns.  Often this will mean having a court appoint someone to serve in this role, even if one of the child’s parents is still living.  It is likely, however, that if a parent is still living, the court will appoint that person.

Having stated the above, there may still be additional challenges.  First, the conservator is often required to post a bond with the court in order to be appointed (even if the person is a parent).   The bond is based on the value of the child’s assets.  Oftentimes the bonds are more expensive than what the conservator/guardian expects.  Secondly, the conservator may be limited to the types of investments that can be made with the assets.  Thirdly, no matter how smoothly the proceeding goes, it is still a legal process, which must be run through the court system.

A simple solution to this problem may be to establish a revocable trust as beneficiary of the policy.  This will allow the insured to decide who the trustee will be, when the child will receive the money, and how the assets should be invested.  If the estate is large enough and an estate tax problem may exist, then an irrevocable trust may be the solution to not only solving some of the challenges mentioned above, but also avoiding any estate taxes on the policy proceeds.