Gifting to Minors
You can absolutely designate minor children to receive money under retirement accounts and life insurance policies. However, you NEVER want to designate that the child receive those monies outright. In other words, you would not simply fill out the child’s name and information, like you would an adult beneficiary. This is because minors may not own property.
Worse Case ScenarioIf you were to leave these accounts directly to the child, upon your demise, an adult would have to petition the court to become a property management guardian. This is the case even if the child has living parent(s). Once appointed, the guardian could collect the funds and hold then hold them in a savings account for the child until they reach the age of 18. Once the child turns 18, the funds must be turned over to them.
Clearly, designating a minor beneficiary on any account has devastating consequences. Aside from the cost and delay of a court proceeding, the guardian has no power to invest the monies or take distributions from retirement accounts. Rather, all funds must be cashed in and put into a savings account, representing a potential loss of tens of thousands of dollars had the monies been invested or, in the case of retirement accounts, stretched and taken over the child's lifetime.
What's the Best Course of ActionOne way to leave assets to a minor is to create a custodian account under the Uniform Transfers to Minors Act ("UTMA"). UTMA allows funds to be held by an adult custodian until that beneficiary reaches 21 years old (18 if the account was set up before January 1, 1997), at which point the beneficiary is entitled to do anything he or she wishes with the account. The custodian can access the funds prior to the child's age of majority for limited purposes.
The better way to leave assets to a minor is to create a trust for their benefit. This trust can be created in a Will or a Living Trust document. The benefit of using a trust is that it can provide for creditor protection, tax savings when the beneficiary passes away, and freedom to select a Trustee who can manage, invest and spend the money for the beneficiary with less restriction. You can also decide whether or not you want the beneficiary to become a Co-Trustee or sole Trustee when they reach a certain age. If the trust is receiving retirement accounts, it should be drafted to include provisions to accept those benefits in the most tax efficient manner.
While it may seem complicated to take these extra steps to designate your minor grandchildren as beneficiaries now, it is important to consider the detrimental consequences if such steps are not taken. Speak to your estate planning attorney to discuss what options would best fit your plan.