Many people buying life insurance care about protecting the little ones in their lives.
But a minor (someone under the age of 18) cannot own assets, so how do you designate beneficiaries?
Never Do This
Do not write in your minor child as a beneficiary, either primary or contingent. This is a common mistake.
A minor cannot own assets directly. A trust or authorized adult needs to be involved.
What You Should Do...If You Don't Yet Have a Will / Estate Plan
[Full name of grownup you'd trust to manage money in the child's best interest] as custodian for [full name of child], under UTMA
Example:
Anna Batista Chawla as custodian for Delia Elizabeth Frost, under UTMA.
Once you have a will or estate plan in place (which we definitely recommend!), then you can revise your life insurance beneficiary designations, if necessary.
What You Should Do...If You Have a Will / Estate Plan
First, great work getting that done! Second, it's best to ask the attorney you worked with how to designate beneficiaries so that the insurance proceeds go where you would want them to go.
There's (way) more than one way to do an estate plan, so making sure your estate plan and life insurance "play nicely together" is important.
A Word of Caution for People with (Many) Millions of Dollars
There's one thing you should be aware of: if you buy life insurance as an individual and later want to transfer it to a trust (a common technique for removing the assets from your estate), you'll need to stay alive for at least 3 years - after the transfer to the trust - in order to have those life insurance proceeds not count as part of your estate.
If, instead, you set up a trust first and have the trust buy the life insurance, then the life insurance proceeds would be outside your estate from Day 1 (assuming you work with a competent attorney who structures the trust properly, which we recommend).
This consideration is relevant to you only if:
-
Your net worth is - or you expect it to be - over the Federal basic exclusion amount (currently $11.18mm / person of $22.36mm / married couple in 2018...this number gets adjusted for inflation each year, and it will get cut in half from whatever it is at that future date on 12/31/2025, unless additional legislative action is taken),
or -
You live in a state with an estate or inheritance tax and your net worth is high enough to incur meaningful taxes (make sure you really understand how much you can expect to save vs. the legal fees you'd incur!)
AND -
You've decided that you'd like to spend the time and money today to set up your estate to optimize estate tax minimization*
*People take different approaches here. Some people - particularly those in good health and in their 20s-to-40s - take the approach, "who knows what estate tax law will be when my time actually comes...I want to do a simple, relatively inexpensive estate plan today to ensure that my loved ones are taken care of and my estate doesn't get tied up in any painful court processes, but I don't want to pay too much money to optimize against today's estate tax rules. Maybe once I'm in my 50s or 60s, I'll take a look at what the laws are, and decide if it makes sense to spend the money and time to update my estate plan."
Other people take the approach "I want to minimize my estate tax bill today. I get that the law could change in a way that will render all my prior planning moot, like the limits could get raised well above my net worth. But I'm fine with that. I'd rather spend the money today to be sure my heirs never pay a penny more than they have to in estate taxes."
Either approach is fine, just know that if you're ready to do estate planning to keep your life insurance proceeds out of your estate, then that's the one case where you should perhaps fire up that estate planning ASAP, before buying the life insurance.
