Imagine: An insured person (the “Insured”) –you or someone who loves your minor child — names your child as the beneficiary under a life insurance policy. If the Insured dies and your child is under eighteen (18) years old, be prepared for the insurance company to refuse to pay out. You may think, “I’m the parent, custodian, or spouse of the decedent, so why won’t the insurance company pay me?” Let me explain why.
Insurance Payment and Minor Beneficiary
The insurance company won’t pay for several reasons:
- The insurance company wants to ensure that the funds left for the minor beneficiary won’t instead be used by the custodian parent for the parent’s personal use;
- The insurance company wants to ensure that the minor beneficiary is protected and might require that the parent or conservator be appointed as a guardian, so that the funds are protected for the minor child;
- The insurance company doesn’t want to be sued because they are liable to the minor beneficiary until the statute of limitations has ended, which only starts to run when the minor beneficiary turns eighteen (18);
- The insurance company wants to open up an account and place those funds into their own proprietary investment(s), until the minor beneficiary turns eighteen (18) — because it helps the company generate money;
- The life insurance company may want to put the funds into the Registry of the Court where the funds will be controlled and protected until the minor beneficiary turns eighteen (18).
Should Parents File for Guardianship?
Parents who want to be in charge of their minor beneficiary’s funds payable from a life insurance policy, and don’t want those funds to stay at the life insurance company long-term, should file for guardianship or file to create a management trust. This can be a costly undertaking – in time and in money. Not only are there legal fees, filing fees, ad litem fees, and fees for filing an annual accounting with the court, it also takes a significant amount of time to establish the guardianship.
In a guardianship proceeding, the guardian would have to: (i) be bonded in an amount equal to the cash value of the life insurance policy proceeds; or (ii) ask the court to create a management trust so a trust company could manage the funds. The catch? The life insurance proceeds would more than likely have to be more than $250,000.00 in order for it to be “financially beneficial” for a bank or trust company to manage the funds.
If the funds are less than $250,000.00 and no trust company will accept appointment as Trustee, the guardian would have to be represented by an attorney during the entire pendency of the guardianship, file an annual account, and file motions with the court every time the guardian wanted to seek court authority to access the funds.
Advantages of a Management Trust
A word of caution: if you are considering leaving the minor beneficiary’s funds with the life insurance company – they are inaccessible until that minor beneficiary turns eighteen (18). If you were to put the funds into a management trust and that minor beneficiary needed braces, a car, etc., the management trustee could make distributions. Additionally, in a management trust, the court could mandate that the funds are not fully distributed to the minor beneficiary until the minor was older than eighteen (18) years old.
Another reason not to keep the funds with the life insurance company is if the minor beneficiary turned eighteen (18) and received that large cash sum, the likelihood of the minor beneficiary making wise decisions about their newly acquired funds is low. Additionally, if the funds were kept in a life insurance company “proprietary investment” and the minor beneficiary turned eighteen (18) and received those funds, that minor beneficiary is no longer able to qualify for college student loans. That minor beneficiary would have to disclose that they have assets on the financial aid form, which would more than likely disqualify them from receiving financial aid. By holding the funds inside the management trust, the minor beneficiary would not have to disclose the trust on the financial aid form.
Many times, in an effort to keep the funds invested in the life insurance company’s “product, ” the insurer will not recognize a court order creating a management trust. If you do file to have a management trust created for the minor beneficiary, you must have specific language included in the order stating that the management trust is in lieu of a guardian of the estate. The life insurance company’s second-best option to retain the funds in one of their “proprietary investments” comes with the appointment of a guardian of the estate, so the funds remain within one of the life insurance company’s “proprietary funds.”
The best way to protect funds left to a minor beneficiary is to: (i) leave the funds to a Trust already set up for the benefit of the minor beneficiary; or (ii) leave the funds to your estate, which includes a testamentary trust.
To learn more about setting up a trust for your family situation or for other questions regarding probate and trust matters, contact Donna Yarborough.
Image by drobotdean at Freepik | Create great designs, faster
