You cannot name a legal minor as a beneficiary. This applies to almost all legal documents, most notably wills and life insurance policies. The significant exception to this rule is trusts. You can name a legal minor as the beneficiary of a trust. That’s particularly important because, if you want to leave assets to a minor, a trust is how you’ll do it. Here’s what you need to know. However, you may want to consult with a financial advisor or lawyer before moving forward.
Every State Has Its Own Laws
As a threshold matter, it’s important to understand that property and estate laws are highly state specific. Every jurisdiction will have its own laws that apply to issues such as property rights, insurance and estate laws. Even the age at which someone is a legal minor changes from state to state.
Most states will use a version of these laws, but each will have its own specific rules. In some cases, a state’s laws may be entirely different from another state’s laws. Make sure to consult with a local attorney before you make any decisions regarding your own money and estate planning.
What Is a Beneficiary?
Several different legal documents can name someone as the beneficiary of any underlying assets. A beneficiary is the third party who receives some benefit from the document, typically in the form of financial or other property assets. While many documents can name a beneficiary, they’re most common in estate law. This is chiefly because beneficiaries are third-party recipients named in some documents and estate law is entirely concerned with making distributions from the deceased to third parties.
There are four main types of documents that can name a beneficiary when it comes to estate planning:
- Wills: In a last will and testament, a beneficiary is someone who the will names to receive assets from your estate.
- Life Insurance: In a life insurance policy, a beneficiary is someone who receives a payment from the life insurance policy after the death of the policyholder.
- Retirement Accounts: In a retirement account, a beneficiary is someone who receives the assets in the account after the death of the account holder.
- Trusts: In a trust, a beneficiary is someone who receives assets from the account based on the terms of the trust and the trustee’s management.
Can a Minor Be a Beneficiary?
Under most circumstances, a minor cannot receive assets as a beneficiary. The major exception to this, as discussed below, is trusts.
Legal minors are defined as children who have not yet reached their state’s age of majority. Most states set the age of majority at 18, although in a handful of states, this age can reach as high as 19 or 21. Legal minors cannot take legally binding actions. Among other things, this means that they cannot sign enforceable contracts and they cannot participate in financial transactions.
Because minors cannot participate in financial transactions or handle their own legal matters, they cannot receive assets through contracts and legal documents. This means that they cannot directly inherit through a will, nor can they receive assets through a contract such as a life insurance policy or a retirement account.
However, minors can be named as beneficiaries of a trust. This is because the beneficiaries of a trust do not participate in contractual or financial transactions. A trustee manages the assets in the trust and then distributes them on the beneficiary’s behalf as directed in the terms of the trust. This can range from making payments, for example paying the mortgage on a home or a college tuition, to sending assets to the beneficiary in a simple property transfer.
What Happens If a Minor Is a Beneficiary?
You can name a legal minor as a beneficiary to any document. Many people do this when they name their children on documents like their will or life insurance policy, counting on the idea that those children will age into adulthood before receiving any assets. As long as the named party is a legal adult when they actually receive the assets, they can do so with no problem.
However, even if they are properly named in the document, legal minors cannot receive assets as a beneficiary under a will, a life insurance policy or a retirement account if they are a minor at the time of the transfer. If this happens, the assets are instead distributed to an entity that can legally receive the property and hold it on the minor’s behalf until they reach the age of majority. Typically this involves three possible situations:
- Legal Guardian: In this case, the minor’s legal guardian receives the assets and holds them on the minor’s behalf until they reach the age of majority. This is common for children who have a parent or legal guardian. In almost all cases, a probate court will approve the handoff of assets to the guardian.
- Custodial Account: In this case, the assets are placed into an account and a legal adult is appointed to manage the assets until the minor reaches the age of majority. The details of this process vary widely based on the nature of the assets and the custodian. For example, if the legal child has a parent or guardian that guardian will typically act as custodian. If they do not, a court will typically name a custodian to manage the assets. In almost all cases, a probate court oversees the creation of a custodial account.
- Trust: In this case, the assets are placed in trust on behalf of the legal minor. A legal adult is named as the trustee to manage the trust with the legal minor named as the beneficiary to the fund. In almost all cases a probate court oversees the creation of this trust fund and it will distribute all of the assets once the child reaches legal majority.
Some retirement accounts, specifically IRA accounts, work slightly differently. Under the SECURE Act, a minor beneficiary cannot take out assets from an IRA after the accountholder’s death. They must leave the money in place until they turn 18.
Once the minor beneficiary reaches age 18 they take all of the assets out of the account within 10 years. They can transfer these assets to another portfolio or they can sell the portfolio for cash.
Naming Minor Beneficiaries With Trusts
The court process can take time, sometimes a lot of time. And court-appointed custodians and trustees are often very expensive. But what if your children are still under the age of 18 and you would still like to name them as beneficiaries of your will or life insurance policy? Generally, the best thing to do is to establish a trust.
You can establish a trust in the terms of your will or you can do so during your life, essentially creating the fund and setting it aside unless needed. When you create the trust you will name the trustee who will manage the fund, either a trusted adult who will work for free or a professional entity who will charge for their services. You then set the terms of the trust. These terms define how the trustee will manage its assets and how it will distribute those assets to and on behalf of the beneficiary.
Finally, you will name the trust as the beneficiary on documents like your will and life insurance policy. As a legal entity, the trust can receive these assets.
If you die, the trust will directly take the assets to which it is a beneficiary. The trustee will manage the assets and distribute them as necessary for the child’s welfare, per your instructions. Then, once the child is old enough, the trust can wind up and pass along its principal to the beneficiary, again if you have set it up to do so.
When your heirs and beneficiaries reach the age of majority, you can change your estate planning to name them directly, removing the trust once it’s no longer necessary. This allows you to care for minors despite the fact that you cannot leave them their money directly.
The Bottom Line
Minors cannot receive assets as a beneficiary under documents like a will or a life insurance policy. Instead, the best option is to leave this money in a trust until they reach adulthood. It’s important to consult with a financial advisor for full estate planning in order to make sure your individual needs are met.
Trust Planning Tips
- Here’s the even better news, you don’t have to figure this out on your own. A professional financial advisor can help you analyze your situation and make the right moves for your estate. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- The best way to prepare a trust in advance is with a living trust. Let’s review how you can set up a living trust and why you might want to do so.
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