Many clients come to AboveBoard for life insurance because they have minor children (under the age of 18) who depend on them. Oftentimes, they’ve not yet had a chance to set up a will or trust.

You should never delay getting life insurance because you don’t yet have a will or a trust. It’s quite easy to update your beneficiaries to sync with your will or trust once you have one.

A less-than-perfect beneficiary designation is always vastly better than your loved ones having too little money to get by comfortably if you die.

If you’ve already set up a will or trust to provide for your minor children, excellent - that is by far the best solution.

This blog post is for people who do not yet have a will or trust.

We are not lawyers here at AboveBoard and nothing in this post should be taken as legal advice. This is general information to help you navigate life insurance.

The Problem

A minor cannot legally own assets directly. If you name your minor child as a beneficiary on your life insurance and you die, the insurance company cannot and will not cut a check to your child. 

The insurance company will need proof that a duly appointed adult is receiving the funds on your child’s behalf. Read: courts get involved. This is no good.

The good news is you do not have to set your loved ones up for a miserable experience in probate court.

Without a will or trust, there are two ways to name a minor child. Both require you to choose a trusted grownup, the only question is how you designate them.

Spoiler Alert: What We Usually Recommend

Of the two options noted below, we generally recommend Option #1: Use UTMA (Uniform Transfers to Minors) to Name a Trusted Grown-Up.

Option #2: Name a Trusted Grown-Up Directly can be a good choice if you are very confident that the risks highlighted below are not applicable for your specific situation.

While UTMA has some drawbacks, they are usually less catastrophic than the risks of naming a trusted grown-up directly.

Whichever you choose, this approach is ideally a temporary one. Once you've had a chance to put a will  or trust in place, you'll update your beneficiaries to reflect that (changing beneficiaries is fast & easy to do).

Option 1: Use UTMA (Uniform Transfers to Minors) to Name a Trusted Grown-Up

Example of how to do it: 

Sarah Miller as financial custodian for Chloe Singh under UTMA (NY)

Things to know:

• Nothing about this puts the named grownup in charge of raising your child. This is only about who handles the money. Guardianship of the child is a separate matter.
• UTMA is a construct to hold assets for the benefit of minor, until they reach the age of majority, which is 18 or 21 in most states
• UTMA comes with a legal obligation to use the money in the best interests of the child
• Because the assets are legally held in an account for the benefit of the child, they should not get caught up in lawsuits, divorces and / or bankruptcies involving the adult
• Any remaining money in the UTMA goes to the child at the age of majority (18 or 21 in most states)
• UTMA is not great for financial aid offers (the calculations take a lot of any existing UTMA balances)

The two biggest drawbacks of UTMA are the child getting any remaining funds at the age of majority and hurting potential financial aid.

Despite its imperfections, UTMA tends to reduce the risk of catastrophe vs. Option #2. That’s because getting a smaller financial aid package or wasting money as a young adult is way better than your child not having enough money to grow up comfortably because it was lost to a trusted grownup’s divorce, lawsuit, bankruptcy, etc.

Option 2: Name a Grown-up You Trust Directly

Example of how to do it: 

Sarah Miller

(You’ll need to provide her SSN to name her as a beneficiary, too.)

Things to know:

• The money belongs to the grownup, not the child
• If the trusted grownup goes through a divorce, a future ex-spouse of the trusted grownup could potentially take half of your life insurance proceeds
• If the trusted grown-up goes through a bankruptcy (this does not require being financially irresponsible, it could be a health crisis), your life insurance money would not be set aside for your child, it could be used to satisfy the grown-up’s debts
• If the trusted grown-up were ever sued (say they caused a serious car accident), this money would not be protected and could be taken in a lawsuit
• If the trusted grown-up themselves dies before the child is legally an adult (18 or 21 in most states), what happens to the money? If they do not have a will or trust that specifically sets aside money for your child(ren), all their assets (including your life insurance proceeds) will be distributed in accordance with state intestacy laws, which could potentially leave your child with nothing
• The grownup has full discretion in what they do with the money, you're relying solely on trust that they will use it for the best interests of the child
• If the grownup receives - or some day applies to receive - any means-tested assistance (e.g. Medicaid), your life insurance money could make access to those benefits impossible.

Many of the risks noted above are not highly likely. The problem is that if any of them come to pass, they can be really terrible for your child.

Some clients feel confident taking these risks. That can be perfectly reasonable. Say you are an only child of two healthy, financially savvy and well-off grandparents. Their estate plan clearly benefits you and your children. They carry excess liability insurance. You might reasonably decide you're comfortable not using UTMA, and instead choosing Option #2.

Conclusion

For clients who have not yet put a will or trust in place, we would generally recommend Option 1: Use UTMA to Name a Trusted Grown-Up over Option 2: Name a Trusted Grown-Up Directly, for the reasons outlined above. 

To be clear, we are not attorneys here at AboveBoard and this is not legal advice; think of this as sharing general knowledge / common practices. If the details of legal asset ownership matter in your situation (e.g. you have specific questions like "would the assets mess up my mom's access to X public benefit?"), those are best handled by an attorney. 

The best solution is to get a will or trust in place after your check life insurance off your to do list, and then update your beneficiaries accordingly. A proper estate plan can legally protect the assets for your children, and provide rules for transferring the money when they're old enough and mature enough to handle it.

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