Leaving Money to Minor Children: Why Naming Them Directly Can Backfire
When parents fill out a beneficiary form for a life insurance policy or an investment account, it can feel natural to write in their children's names. After all, the kids are who the money is for. But when a beneficiary is under 18, naming them directly can create problems that most parents never intended. It's one of the issues I watch for when reviewing plans for young families in Marin County.
The problem: minors can't take control of assets
Under California law, a minor generally can't take legal control of a significant amount of money or property. So if a child is named directly as a beneficiary, an insurance company or financial institution typically won't simply hand the funds over to them.
What can happen instead
• Court involvement. A court may need to appoint a guardian of the estate to manage the money until the child turns 18. That process usually involves court filings, ongoing supervision and reporting, and costs that come out of the child's inheritance.
• A surviving parent may still need court approval. Even a child's other parent doesn't automatically have the legal authority to manage money the child inherits.
• Everything at 18. When a court-supervised guardianship of the estate ends, the child generally receives whatever is left outright at age 18. Most parents wouldn't choose to hand an 18-year-old a large sum with no guidance.
The same issues can come up when a will leaves property to a minor without setting up a structure to hold it.
Better ways to plan for children
• A trust for your children. Many parents set up a trust for their children, often as part of their living trust, and then name the trust as the beneficiary of life insurance and other accounts. You choose the trustee who will manage the money, and you decide when and how your children receive it. For example, a trust can pay for education and health care along the way, then distribute funds in stages as your children mature.
• A custodian under California's Uniform Transfers to Minors Act. This is a simpler option in which a named adult manages the assets for the child. It has less flexibility than a trust, and the custodianship generally ends somewhere between ages 18 and 25, depending on how it was set up, when the child receives the assets outright. Some institutions let you name a custodian directly on the beneficiary form.
• Special care with retirement accounts. Naming a trust as the beneficiary of an IRA or 401(k) involves special tax rules, so it needs to be drafted and coordinated carefully rather than filled in on a form without advice.
Raising your children vs. managing their money
Parents often focus on who would raise their children, and that choice matters enormously. You can nominate a guardian in your will. But the person best suited to raise your children isn't always the person best suited to manage their money. A good plan lets you choose each role separately, and it can be the same person or two different people.
What to check this week
Take a few minutes to look at who is named on your:
• Life insurance policies, including any group life insurance through your employer.
• Retirement accounts, such as IRAs, 401(k)s, and 403(b)s.
• Bank and brokerage accounts that have payable-on-death or transfer-on-death designations.
If you see a child's name listed directly, that's a sign your plan may not work the way you expect.
The bottom line
Naming your children directly comes from a loving place, but it can lead to court involvement, added cost, and a lump sum at 18. With a little planning, you can make sure the people you choose are the ones managing your children's inheritance, on a timeline that makes sense for them.
If you'd like help reviewing your beneficiary designations or setting up the right structure for your children, I'd be glad to talk it through. You can schedule a Discovery Call here.