Most people want to pass their assets to their children or grandchildren, but naming a minor as a beneficiary can have unintended consequences. It is important to make a plan that doesn’t involve leaving assets directly to a minor.
There are two main problems with naming a minor as the beneficiary of your estate plan, life insurance policy, or retirement account. The first is that a large sum of money cannot be left directly to a minor. Instead, a court will likely have to appoint a conservator to hold and manage the money. The court proceedings will cost your estate, and the conservator (known as a guardian of the estate in Virginia) may not be someone you want to oversee your children’s money. Depending on the state, the conservator may have to file annual accountings with the court, generating more costs and fees. In Virginia, a guardian of the estate of a minor must also usually have to secure a surety bond with an insurance company in an amount sufficient to cover the dollar amount of the bequest passing to the minor. While the cost for such bonds is usually a small fraction of the dollar value of the bequest, the premiums for such bonds are due and payable annually, and qualification for such bonds can be difficult for individuals with a poor, or no, credit history.
The other problem with naming a minor as a beneficiary is that the minor will be entitled to sole control of the funds when he or she reaches age 18 or 21, depending on state law. There are no limitations after that age on what the child uses the money for. While you may have wanted the money to go toward college or a down payment on a house, the child may have other ideas (or bad actors may have given your child ideas). In Virginia, the age is 18, when most people are fresh out of high school and have little to no experience managing money.
The way to get around these problems is to create a trust and name the minor as beneficiary of the trust. A trust ensures that the funds are protected by the trustee until a time when it makes sense to distribute them. Trusts are also flexible in terms of how they are drafted. The trust can state any number of specifics on who receives property and when, including allowing you to distribute the funds at a specific age or based on a specific event, such as graduating from college. You can also spread out distributions over time to children and grandchildren.
If you do create a trust, remember to name the trust as beneficiary of any life insurance or retirement plans. If you forget to take that step, the money will be distributed directly to the minor, negating the work of creating the trust.
To create a trust, consult with your attorney.
*This article is provided for persons interested in elder law issues in Virginia and across the United States. This article has been written by a practitioner in the field of elder law, but unless otherwise noted, the writer is not affiliated with ThompsonMcMullan, P.C. Nothing in the newsletter or the articles is, or is intended to be, legal advice or a substitute for legal advice. If you need legal advice of any kind, please consult an attorney with experience in that area of the law, whether in our firm, or otherwise.