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If you’re a parent or just recently became one, you want to be sure that you make all the right moves to protect your child’s interests. For most parents, that includes taking their death into account and ensuring that their children will have financial resources available to them after such an event.

A lot of this is accomplished through estate planning, but a parent with a life insurance policy might wonder whether naming their minor child as a beneficiary is a good idea. Although parents can do this, there are a few reasons why they should reconsider their strategies.

How to Ensure Minor Children Benefit from a Life Insurance Payout

Because they are not legal adults, minor children can’t directly receive the proceeds of a life insurance policy. Instead, the proceeds would be placed in the care of your child’s legal guardian, who manages the money and determines how to spend it.

If you have an estate plan, chances are you already took legal guardianship of your minor children into account. Most people select family members or close friends who they trust to care for and support their children should the parent(s) unexpectedly pass away.

This might be a fine arrangement for some, but not everyone will want their child’s legal guardian handling such important assets with very little accountability. In this case, there are two other ways to ensure your minor child benefits from the proceeds of a parent’s death benefit: establishing a trust or a Uniform Transfers to Minors Act (UTMA) account.

What Does a Trust Do?

Parents can choose to establish a trust, in their child’s name, and name it as the beneficiary of a life insurance policy. When a death benefit is paid out, it goes to the trust, which is managed by a trustee on the behalf of the child, who is themselves the beneficiary of the trust.

This can be an effective way to ensure that your children will have the financial means available to them to afford living expenses, education, and more. Trusts can be configured in all sorts of ways, too. For example, parents often let their children take full control of life insurance trusts when they reach age 25.

When it comes to a child with special needs, setting up a life insurance trust can be vitally important. Because these children may grow up to become adults with special needs, parents establish trusts that ensure any death benefits a child receives from a life insurance policy won’t interfere with their eligibility for important income-capped public benefits.

Uniform Transfers to Minors Act Accounts

If parents don’t want to go through the trouble and expense of establishing a new trust, they can opt for a Uniform Transfers to Minors Act account. This account allows a minor to receive gifts (like life insurance benefits) without aid or interference from a guardian or trustee.

Instead, parents can choose an “appointed custodian” to manage their child’s UTMA account until the child turns 18. An important consideration, though, is that the UTMA assets count toward the custodian’s taxable estate until the minor takes possession of the account, so great care and consideration must be taken when selecting a custodian.

Need Help with Life Insurance? Call Our Specialists Today!

At Insurance Specialists, Inc., we exist to ensure our clients find the right kinds of insurance policies to protect various aspects of their lives. We also want to ensure potential clients have the information they need to make the decisions that are right for them, which is why we write articles like this.

If you want help finding a life insurance policy that works for you and your loved ones, reach out to our team to learn more. Contact us online now to get started!