Why You Should Never Designate Your Minor Child as a Beneficiary of ANYTHING!

As parents, we do all sorts of responsible things for our family – and in particular, with our kids in mind.  For example, we buy all sorts of different things, such as 1) life insurance, 2) 529(b) college savings accounts, 3) 401(k)’s, 4) IRA’s, 5) brokerage accounts, 6) annuities, and the list goes on and on.  So, of course you should designate your minor child as the beneficiary, right???  WRONG! You should never designate your minor child as a beneficiary of anything.  And here is why…

When any individual begins planning and drafting her Will and other related documents, they face many different options, each of which has a specific function and each of which must be taken into careful consideration.  But, aside from what happens in the Will, there are other financial accounts that may have beneficiary designations.  Those beneficiary designations bypass any terms contained in your Will, and therefore your Last Will & Testament will not control in the face of a beneficiary designation with an account held at a financial institution.  This can lead to expensive, and sometimes drastic consequences.

More specifically, there are many ways in which legal instruments may be used to ensure that one’s children are provided for in the event of a parent’s unforeseen death. But we want to do it smartly, and not create more legal problems for our children down the road.  When the situation arises that involves children who are minors, things can become even more complicated. There are a variety of ways to provide for minor children in a Will; however, the most important thing that must be taken into consideration is the possibility that the children will still be minors at the time of the parent’s death.

For accounts like 1) IRA’s, 2) 401(k)’s, 3), Life Insurance, 4), CD’s, 5) checking and savings accounts, many times these accounts can have beneficiary designations.  Oftentimes, people designate their spouse first and then designate their minor children as the alternate beneficiaries.  Although this may seem like an easy solution that provides for the children directly, the situation is not as simple as it seems. Although usually designating someone as a beneficiary will mean the assets would be distributed directly to them, in the case of minor children Texas law requires the establishment of a guardianship for management of the funds.  This is the case because minors (i.e. people who are under eighteen years of age) are legally non compos mentis, also known as “legally incompetent,” and therefore they cannot cash a check or legally receive any funds directly as a beneficiary.

Although this might seem like a good thing at first blush, having a State of Texas appointed guardian places many hurdles in between a child and what they are to receive after the expenses of a full blown guardianship in a Texas probate Court.  One example of this is the requirement that the guardian of the estate must obtain court approval prior to withdrawing any funds for the minor child. This process can be lengthy, and the possibility of denial by the courts means it may not always end in the child even receiving the money, goods or serves they requested. Court appointed guardianships are also a matter of public record, allowing anyone to view the details of a guardianship account. In addition, accountings must be filed with the court to reflect all disbursements and receipts to or on behalf of the minor. The accounting at Harris County, Texas probate courts are down to the penny.

In order to avoid the headache that can be caused by a Probate Court appointed guardian, many folks have begun to use what is known as a Contingent Testamentary Trust in their Last Will & Testament. At our office, every Last Will & Testament we draft for our clients contains a Contingent Trust for any beneficiary under a stated age.  This earmarks a Trust for a minor child, but it only activates if the child is under a certain age(usually 25 years of age).  Including this Contingent Trust in one’s Will eliminates the legal possibility of ever needing a court appointed guardianship because the designated Trustee of the Contingent Testamentary Trust is able to accept the funds that are distributed to the child. Contingent Testamentary Trusts allow for more control over how, when and for what a children may withdraw funds from the estate, all without having to involve a court appointed guardian. Distributions from the estate can be made for purposes that are stated in the Will and can include health, education, maintenance, and support. In Contrast to a court appointed guardianship, a Contingent Testamentary Trust also offers clients and their children more confidentiality, at a significantly lesser monetary and emotional expense. Because the Contingent Testamentary Trust is an agreement separate from the Will, it is confidential, and a named trustee can manage and distribute funds without having to publicly account or keep public record with the courts.

Ultimately when it comes to couples or individuals who have young children and are planning their ultimate estate distribution, minor children should never be listed as a beneficiary or alternative beneficiary on any assets that will bypass the Will, as set out above. Contingent Testamentary Trusts offer a much more effective tool and help give parents of younger children more peace of mind.  We can direct you how to legally use the operative words for your beneficiary designations to ensure and direct the assets to your minor children, all while doing so responsibly.

If you have further questions, please contact our office today to schedule your free Estate Planning Consultation.  We can send you an email with a link to an online Estate Planning Questionnaire to begin drafting your estate planning documents.  Generally, if the client desires, we can draft all documents in advance of our first meeting and be ready to sign original documents at the office appointment.  We look forward to hearing from you, and let us know if you have any further questions.