Never Leave It to The Court: Why Your Life Insurance Needs a Trust

If you have minor children, buying a life insurance policy is one of the most considerate and responsible acts of love you can do for them. It gives peace of mind that if the worst should happen, your kids will be financially secure. 

When the insurance company asks you to name a beneficiary, naturally you put down your child’s name. Unfortunately, this benevolent gesture is a huge legal misstep. While your intention is to provide for your child, naming a minor child as a beneficiary can be the beginning of a multitude of court battles, hefty legal fees, and potentially frozen funds. 

Here’s why leaving life insurance directly to your child can go awry and how to avoid the problem with a legal tool called a trust. 

Legal Obstacle: Insurance Companies Won’t Pay Minors

The main issue with just leaving life insurance policies to minors is that insurance companies will not payout the money directly to the child. The idea is that minors do not have the legal capacity to sign contracts or to even manage large sums of money. Instead, the courts will step in and appoint a guardian. This could be anyone that the court sees fit to help the minor. This takes the decision of who will manage the money left completely out of your control. The process takes a lot of time and is likely to result in heavy court fees. It is likely that during this time the minor’s funds would be frozen, and they would not have access to any of the money that was left for them. When the money finally gets released to the child, it is subject to being depleted for legal fees. 

Even in the event that the court process goes smoothly and a trusted guardian is appointed, there is still a huge drawback, the money will be given to the beneficiary in full once they hit the age of majority. Without guidance, reckless spending could result in the complete exhaustion of a nest egg that was meant to last longterm. 

The Solution: What is a Trust?

Instead of naming your child as a beneficiary, you can create a trust and name the trust as a beneficiary of your life insurance policy. If you are somewhat unfamiliar with trusts it may sound like a tool that is reserved for the extremely rich and wealthy, but it’s a simple concept that can be utilized by anyone. 

Think of a trust like a box that is created to hold assets, and there are three main participants: the settlor, the trustee, and the beneficiary. The settlor would be the person that created the box and decides what will go in it. In this case, the life insurance policy would be what goes into the box. Think of the trustee as a gatekeeper. This person is someone that you choose to hold the box and who is legally bound to the instructions that the settlor gave as to what to do with the box and its contents. The beneficiary would of course be your child, they would receive the contents of the box. 

By naming the trust as your life insurance beneficiary, it would allow your exact wishes to be executed immediately since the money from the insurance policy will circumvent the court and go directly into the box.

The Trust Advantage: Taking Back Control

By utilizing a trust, you guarantee your child is protected on your term’s, not the court’s. One enormous advantage that trusts give is that you don’t have to worry about a huge amount of money being dispersed to your child on their 18th birthday. You can decide how much is to be given during different milestones of their life, like for college tuition, monthly housing, and even healthcare. Through a trust, you can also make certain that the trustee is someone that you deem to be financially responsible enough to manage large amounts of money. Trusts can even be used for a child with special needs. Whereas simply naming a child with special needs can unintentionally render them ineligible from receiving any government assistance that they may have received beforehand.  

Bottom Line

Estate planning isn't just about riches and wealth, it’s about being in control and protecting those who you decide to impart your assets with. Aligned Advocates is committed to making sure that the fruits of your lifetime labor are protected the way that you see fit!