Designating minors as beneficiaries is an all too common mistake

What’s one of the worst mistakes you can make with beneficiary designations? Naming a minor beneficiary.  Usually this mistake is just based on a lack of understanding how beneficiary designations work as compared to a Will.  People assume that a Will, with all its fancy legal words and formality, will control all of their assets.  Wrong.  The Will only controls property that is subject to probate, basically property that is in your individual name and does not have a beneficiary designation.  Life insurance, retirement assets, and pay-on-death accounts all have beneficiary designations and those designations that you filled out while you where sitting on the couch watching American Idol — that is what controls in the distribution of those assets.

 

Now you are wondering why is it a problem to name a minor if that is who I want to receive the assets.   If you have named a minor as beneficiary directly, then the options for long term management of the assets are very limited.  North Carolina law typically requires that a guardianship be created to handle management of the funds until the child reaches age eighteen.  At age eighteen the child will receive complete access to the funds; eighteen with money to burn!  Also, the guardianship requires someone to qualify as guardian and regularly account to the court.  The guardian will have to be bonded which can be surprisingly expensive depending on the circumstances.  All of this creates extra trouble and expense which will only reduce the assets ultimately available for the child.  Although North Carolina law does also provide for a custodianship for minors, which is a less formal type of guardianship; I have found that the custodianship is only available in very limited cases.

 

One of the main benefits of having a Will when you have minor children is that you can avoid all of this trouble by allowing for a hold back trust.  In this case the crucial step in any estate plan is to ensure that you have beneficiary designations which are consistent with your Will.  Generally your initial beneficiary would be your spouse and, for minor children, your contingent beneficiary would be the holdback trust that is created under your Will or under a separate trust document.  If you want to add  a minor grandchild as beneficiary, the same rules apply; so if you don’t have a trust set up for the grandchild talk to your advisor about other options.  Obviously, there are other matters that play into beneficiary choices such as income tax planning or creditor protection, but I encourage you to check your current life insurance, retirement assets, and other pay-on-death accounts to confirm exactly what beneficiary designations you have.  Details are pretty important in this line of work.