It is important to make preparations for when you inevitably pass away. Putting a comprehensive estate plan in place will make sure your assets will be distributed in a manner you desire. This means choosing your beneficiaries, who are the individuals and entities which will receive your assets after your death. Like many people, you may want to name a minor as one of your beneficiaries. However, there are several implications of doing so that you should be aware of.
Life insurance policy
A minor beneficiary may have some issues with receiving the payout from your life insurance policy since minors are generally not allowed to directly benefit from life insurance. Your chosen minor heir will have to navigate probate court in order to receive the funds. A responsible adult will then be tasked to manage the funds until your beneficiary is ready to handle the money.
You may want to choose a trusted adult ahead of time to be responsible for managing the funds. This can save money and hassle from not having to go to probate court.
Individual retirement account
Similar to life insurance policies, individual retirement accounts (IRAs) are not allowed to directly transfer funds to minor beneficiaries. If you choose your children as minor beneficiaries they will have to wait until they become legal adults before being able to withdraw funds from your IRA account.
After reaching 18 years of age, your children will need to withdraw all funds within 10 years. However, this 10-year rule is not applicable to your grandchildren and other minors.
Assets of considerable value
If you want your minor beneficiaries to receive assets that have significant worth, you should know minors are not allowed to inherit assets of considerable value. Therefore, the minor beneficiary will need to ask the court to create a conservatorship for these assets. Once the conservatorship is in place, an adult will be in charge of managing these assets left to the minor child.
How to avoid needing to name a minor as beneficiary
There are two ways you can avoid having to name a minor as your beneficiary and still have the minor be able to eventually benefit from the assets you want him or her to inherit. One option is to select an adult you trust to be named the beneficiary. This adult beneficiary will then be able to manage the inherited assets on the minor’s behalf. In this way your intended heirs will be able to avoid dealing with the expensive and complicated probate process.
Creating a trust can also help to circumvent the probate process. The trust would hold title to your assets until your chosen minor heir reaches 18 years of age.
Should you name a minor as a beneficiary?
There could be several different financial and legal factors to consider before finalizing your decision to name a minor as beneficiary to your estate. Some of these considerations might be the value of the estate assets and among how many heirs you want to split your assets. You may want to consider consulting with an expert in personal finance who will have the knowledge to guide you to the right decision.