It’s no secret that some life insurance agents scan the newspaper looking for announcements of newborn babies. After all, the proud parents now have a reason to purchase some life insurance. The need for life insurance in such a case is obvious. If the family breadwinner dies prematurely, the life insurance proceeds will be available to support the family, and if both parents die, the insurance is there for the support of their children. Understanding this concept is not difficult, however, getting your insurance to pass to the correct beneficiaries requires more thought.
In a typical case, a married couple with young children will insure the life of the spouse who generates the bulk of the family income. The surviving spouse will be designated the beneficiary of the life insurance. As such, if the insured spouse dies, the survivor receives the death benefits and will be able to continue paying the mortgage and feeding the kids. On the other hand, what if both parents die? Who then should be beneficiary of the life insurance? Most often, the parents will name the children as the beneficiaries if there is no surviving spouse. This, however, is probably not what the parents really want.
There are a few problems with naming young children as life insurance beneficiaries. The basic problem is if the children are under age 18, a guardian will have to be named to manage the insurance money for them. The parents have the right to name this guardian as part of the life insurance beneficiary designation or as part of their Wills. If they don’t name the guardian, the court will appoint one. The more significant problem is that in Pennsylvania such a guardianship ends at age 18. At that point, any remaining money is given directly to the children. When you consider that the life insurance monies may be $50,000, $100,000 or more, most parents feel that such a sum is too much for any 18-year old to handle. Rather, they desire that the money be managed for their children’s benefit beyond age 18. To do this, the parents must create a trust.
Perhaps the easiest way to establish such a trust is to include it as part of your Will. The Will would state that if both parents die, the estate assets, including any life insurance, should be held and managed for the benefit of the children. A trusted relative or bank would be named as trustee and would have the discretion to distribute the money for the child’s health, support and education. The trustee is then told to distribute the balance of the trust at different age intervals. Perhaps, one-quarter at age 21, one-half at 25, and the rest at age 30. The exact terms of such a trust can vary, but the plan is that the money be managed for the child until such time as he or she is more mature.
In order to arrange such a plan, two steps are necessary. First, the parents must draft a Will with these sorts of trust provisions. Second, after the Will is in place, the parents must then name the trust as the contingent beneficiary of the life insurance. If it’s done properly, then if both parents die, the insurance death benefits will be paid to the trustee and held in accordance with the terms of the trust.
An alternative to a trust is to direct funds for a minor be held in a “custodianship” under the Uniform Transfers to Minors Act. As a result of recent changes to Pennsylvania’s version of the Uniform Act, a custodianship created for a minor at one’s death can extend until the minor attains the age of 25 years. A custodianship for a minor created while you are living must end when the minor reaches age 21.
