Minor Kids Make Bad Beneficiaries

Vested Partners A Multi-Family Office Blog

They're cute and all, but children cannot manage an inheritance, and neither can anyone else without heading to court

Do you have life insurance or a retirement account with children under the age of 18 listed as beneficiary?  It’s a bad idea.

A person under the age of 18 in Virginia cannot transact business for themselves.  That means they cannot sign beneficiary claim forms.  Many people think that a parent can sign on behalf of a child by virtue of being the child’s mother or father.  This is not the case in Virginia.

In order for someone to be able to access an inheritance or other assets on behalf of a child in Virginia, they must first petition the circuit court to become the “Guardian of the Estate of a Minor.”  This involves hiring an attorney to file the petition, having another attorney appointed as Guardian ad litem for the child, and going before a judge for a hearing.  (That’s two attorneys to pay for!) After being appointed as guardian of a minor’s estate, you must typically be bonded (which means the minor’s estate pays a yearly insurance premium), and you must file yearly accountings of what has happened with the funds, along with filing fees.  You are very limited in what the funds can be used for as you are preserving the minor’s assets.

The scary thing is when the child turns 18 – BOOM! – they have access to the funds.

A much better plan when you potentially have minor children as beneficiaries of your estate, life insurance, or other assets, is to establish a trust for the children.  If you establish a trust for the child, you pick the trustee and therefore the person that will manage the trust.  There will be no bond premiums to pay or reports to be filed with the court.  Best of all, you choose what the funds can be used for, and when the child gets distributions.  Trusts can be drafted in many ways to suit your particular situation, including making distributions over time.

If you have children in your life who may become beneficiaries of your assets when you die, planning ahead is such a gift to them.

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