You’ll die – one day. This is a fact. Many people try and do the right thing before they die, and buy life insurance that will provide financial relief to their family in the event of their demise. If you’re married, you’ll likely name your spouse as the beneficiary, but you may also want to name your child as a beneficiary.
The issue is that we never recommend naming your child as a life insurance beneficiary.
Why Your Child Shouldn’t Be a Beneficiary
The issue with naming your child a beneficiary is a monetary one. You want your child to receive the entirety of the life insurance policy, and by naming him or her the beneficiary, you’re opening the door to monetary loss.
By naming your child the beneficiary, you’re opening all of this money to your child’s:
- Divorce proceedings
If there is one thing that creditors will do, it is take every last cent possible from your child in the event that they do receive life insurance or any other settlement. Creditors are vultures, and if your child is getting divorced, this money may also be included in the divorce proceedings.
Minors will also have the issue of accessing the money. If your child is a minor, someone else will be granted guardianship over the estate, and can collect and hold the funds until your child is of legal age.
Unfortunately, guardians don’t always do the right thing when money is involved.
Trusts Are a Better Option
When you make your will, form a trust for your child. A trust is a lot more secure than naming your child an outright beneficiary of a life insurance policy. You will need to name your child the trustee.
Your life insurance policy should name the trust as the beneficiary of the life insurance policy.
The trust will be set up so that your child becomes the trustee at an appropriate age. The trustee of the estate will be able to:
- Invest money on behalf of the estate
- Use trust assets
- Provide trust assets to descendants
The trust will also shelter the money from the life insurance policy. A trust will not be open to:
- Estate or inheritance tax
There are also setups that will allow for there to be a trustee with no trust course. What this means is that your child will be able to maintain and run the trust you setup without having to pay a fee.
Smart, legal and effective, a trust safeguards all of the assets you put into the trust as well as your life insurance policy.
If your child falls onto financial hardship and creditors are knocking on the door, they can easily seize all of the insurance money that you left behind for the financial well-being of your child. A trust will safeguard all of the money from the life insurance policy because the money was left to the trust and not your child. Creditors cannot take money from a trust even if the trustee owes money.
The Micklin Law Group, LLC is a New Jersey law firm specializing in family law and estates. Attorney Brad Micklin was recently named to The National Advocates list of Top 100 attorneys from each state. Brad has a special expertise in working with high asset divorces. You can read more on this topic by visiting our Divorce blog. To set up a consultation, call 973-562-0100.