Can You Leave Life Insurance to a Minor?

Life insurance provides a sum of money to named beneficiaries upon the policyholder’s death. This financial support helps loved ones cover various expenses, such as funeral costs, outstanding debts, and daily living expenses. Designating beneficiaries is a fundamental step in setting up a life insurance policy, as it clarifies who will receive the death benefit and ensures funds are distributed according to the policyholder’s wishes. Without proper beneficiary designations, the transfer of funds can be delayed, potentially causing hardship for those dependent on the policy.

Naming a Minor Directly

While it may seem intuitive to name a minor child directly as a life insurance beneficiary, this approach presents significant challenges. Minors, defined as individuals under the age of 18 or 21 depending on the state, lack the legal capacity to directly receive or manage large sums of money. Life insurance companies cannot release death benefits directly to underage beneficiaries.

If a minor is named as a direct beneficiary without further arrangements, the funds will be held by the insurance company. This often necessitates court intervention to appoint a legal guardian to manage the inheritance on the minor’s behalf. Court proceedings can be time-consuming and involve legal expenses, which may reduce the amount available to the child. There is no guarantee that the court-appointed guardian will be the individual the policyholder would have chosen.

Establishing a Guardianship

Establishing a legal guardianship is one method for providing life insurance proceeds to a minor. A guardian is a court-appointed individual responsible for managing a minor’s financial affairs, including life insurance proceeds, until the minor reaches the age of majority. This process occurs through probate court, which oversees the appointment and ongoing management of the guardianship. Legal proceedings to establish a guardianship can be lengthy and may incur costs like attorney fees and court charges.

Guardians are tasked with managing the minor’s assets, keeping them separate from their own funds. They must use the funds solely for the minor’s benefit, for expenses such as education, living costs, and medical needs. Guardians are obligated to provide regular accountings to the court, detailing income and expenditures, which adds to the administrative burden.

A significant limitation of guardianship is that the minor gains full control of the assets upon reaching the age of majority. A young adult, potentially without financial experience, receives a lump sum of money with no restrictions on its use. The court’s ongoing oversight limits flexibility in how the funds can be used or distributed over time.

Utilizing a Trust

Establishing a trust is considered a more flexible and advantageous method for leaving life insurance proceeds to a minor. A trust is a legal arrangement where assets are held and managed by a designated trustee for the benefit of one or more beneficiaries. The grantor creates and funds the trust, the trustee manages it, and the beneficiaries receive the assets.

When a life insurance policy designates a trust as its beneficiary, the death benefit is paid directly to the trust upon the policyholder’s passing, bypassing probate. This can expedite the availability of funds for the minor. A primary advantage of using a trust is the control it provides over how and when the funds are distributed. The grantor can specify conditions for distributions, such as staggering payments at certain ages or for milestones like college education or marriage.

Trusts offer greater flexibility than guardianships, allowing for tailored financial planning beyond just providing a lump sum at the age of majority. They can also provide protection against creditors for the inheritance and offer estate tax benefits for large estates. While setting up a trust involves legal paperwork and may require an attorney, the ability to specify detailed instructions for fund management and distribution makes it a preferred option for many.

Uniform Transfers to Minors Act or Uniform Gifts to Minors Act

The Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) provide another structured way to transfer life insurance proceeds to minors. These acts allow for the creation of a custodial account, where a named adult custodian manages the funds on behalf of the minor. UGMA accounts handle cash and securities, while UTMA accounts permit a broader range of assets, including real estate and other property.

Setting up a custodial account under UTMA or UGMA is simpler and less costly than establishing a formal trust or initiating a court-supervised guardianship. The custodian has a fiduciary duty to manage the assets prudently and for the minor’s benefit, including making investment and distribution decisions. When designating the beneficiary on a life insurance policy, one would name the custodian for the benefit of the minor under the relevant act (e.g., “John Doe as Custodian for Jane Doe under the [State] Uniform Transfers to Minors Act”).

The primary limitation of UTMA and UGMA accounts is that the minor gains full and unrestricted control of the assets once they reach the age of majority. Unlike a trust, there is no mechanism within these acts to control how the funds are used once the minor becomes an adult, or to stagger distributions over a longer period. This lack of long-term control may not align with a policyholder’s wishes for a large inheritance intended for specific future needs.