Take Care When Naming a Beneficiary

We all know small children are not capable of handling large sums of money. Yet we don't consider that when we name our children as beneficiaries of our life insurance, IRAs and the like. Of course, we intend that the money be managed by caring adults and used for our children's needs. But it is not that simple.

In every state, parents have a legal obligation to support their children. If one of the parents dies, the surviving parent must support the children, no matter how well-heeled the children are. The money your children have cannot be tapped to pay for the necessities of life. But it probably could be used for teenage cars, computers, private school and college, which are not considered necessities.

If both parents are dead, the result is different. The children's guardian would not have the parental obligation to support the children, so the guardian can use the money for the children's support. But to protect the interests of the children, the probate court will probably require the guardian to post a bond and report regularly to the court regarding the use of the children's funds, and the investments made with those funds. That costs both time and money, and by adding the courts' harsh requirements to the equation, it can even damage the emotional bond between the guardian and the children.

A mother may plan to leave everything to, say, her sister outright, but that isn't a very satisfying answer, either. Even if you trust the guardian to use the money for the children, the money is still available to satisfy outside claims. For example, if you leave the money to your sister, hoping she'll use it to care for your children, her husband could lay claim to part of it in a divorce battle. If she causes an auto accident, the money can be used to satisfy any settlement that the accident victims receive. And money left outright to the guardian is also available to creditors in the case of bankruptcy. And if your sister develops a gambling problem (or becomes a day trader), she could lose all the money and your children would have nothing.

Think about a trust

To leave money to a child, your best bet is to establish a children's trust and leave the money to the trust. The trust you establish would give the trustee (whomever you choose) the ability to use the money for the health, education and support of the children. The trustee would have a fiduciary obligation to carry out the terms of the trust but would not have to report to the probate court or post bond. The trustee doesn't have to be the same person as the physical guardian of the children. I have frequently been named financial guardian of children's funds by friends of mine, who are naming their relatives as physical guardians but don't want to entrust the kids' money to those relatives.

Estate Planning for Your Children

  1. Start planning now, especially if you and your children are young and healthy.
  2. Obtain legal help for your estate planning (this is a must) -- ask friends for recommendations or call your local bar association.
  3. Keep careful records of all your assets.
  4. Review your estate plan as your family and assets grow and get older.

Most people put the following designation on their life insurance for beneficiary: "To my husband, if living, otherwise to be divided equally among my children." At the very least they should name a guardian for the kids, but establishing a children's trust is best. The trust can be as simple or elaborate as you please, and it won't become activated unless you die while the children are minors. The trust can be drawn up at the same time as your will, and most of the will-making computer programs include children's trusts.

Resources
Nolo.com, the legal advice Website, has excellent information on choosing a guardian and leaving property to your children.

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