My wife and I are expecting our third child any day now, so when I saw Erik Canter’s post over at Forbes.com on financial and estate planning for new parents it caught my attention. It is generally a good article, with solid advice. He suggests that new parents update their estate plans, which includes their Wills and/or their Revocable Trust documents, powers of attorney and living wills, and any beneficiary designations for retirement accounts and life insurance. He also suggests that parents re-evaluate life insurance coverage, review the family budget, and begin planning for college expenses. These are all important steps for new parents.
However, there is one critical error in Erik’s advice. He appears to suggest that parents should name their child (or children) as a beneficiary of life insurance and retirement benefits directly, which is almost always a terrible idea. This is because minors are not allowed to manage their own property, and if on the parent’s death a minor child is designated to receive insurance proceeds or retirement benefits directly, a Court will have to appoint a Guardian of the Estate to hold the property for the child until adulthood.
Having a Guardian of the Estate appointed requires formal legal proceedings which will produce additional legal fees (usually well in excess of the cost of planning to prevent the situation). Also, the time it takes to obtain an appointment of a Guardian of the Estate may cause delay in the distribution of funds which are often needed for the child’s immediate care. In addition, in Pennsylvania, a surviving parent may not be appointed as sole Guardian of the Estate (i.e. a co-guardian is required).
Just as troubling, when a child turns eighteen the Guardian is legally required to distribute all of the property to the child directly. I think that generally speaking, teenagers do not have the life or financial skills required to manage significant wealth. Also, if life insurance was intended to provide for the child’s higher education, distributing the proceeds (perhaps hundreds of thousands of dollars or more) at age eighteen may have the exact opposite effect.
It is far more advisable to name a trust for the child as the beneficiary. The trust can be established in the parent’s Will, as part of a Revocable Trust, or even as a stand-alone document. Using a trust reduces the chance that a Guardian of the Estate will need to be appointed and allows parents to ensure a trusted adult will have control of a child’s inheritance until the child is old enough and mature enough to handle the responsibility.
It is very important for parents to update their estate plans when they have a child, and beneficiary designations are critical components of a comprehensive estate plan. That is why parents should make sure their designations name trusts for their minor children as the beneficiaries, and never as the beneficiaries directly.