If you have investment accounts, retirement savings, or a life insurance policy, you have the option of naming beneficiaries. Many parents name their minor children as contingent beneficiaries to ensure financial support. This has the potential to complicate the transfer of assets. Learn if minors should be listed as contingent beneficiaries and what alternative actions are available.
What Is a Contingent Beneficiary?
A beneficiary is someone eligible to receive distributions from a will, trust, or life insurance policy. Some investments, including those held in a Delaware Statutory Trust from a 1031 exchange, can also acquire beneficiaries. The person or entity who owns the policy, property, or is the grantor of the trust chooses primary and contingent beneficiaries for their accounts.
A contingent beneficiary is a person who receives the proceeds of an account, will, or trust when the primary beneficiary is unable or unwilling to do so. A contingent beneficiary will only receive the proceeds if the primary beneficiary cannot be located, is deceased, or refuses their inheritance when the distribution is made.
Multiple contingent beneficiaries can be named, each receiving a specific percentage of proceeds that totals 100% of the assets. A person may list their spouse as their primary beneficiary and list each of their children as contingent beneficiaries. If the primary beneficiary accepts the inheritance, the contingent beneficiary receives nothing.
Can Minors Be a Contingent Beneficiary?
It’s common for parents to list their children as beneficiaries, even if they’re minors. A minor doesn’t have the legal power on their own to accept the assets they’re awarded. A legal guardian is appointed when a minor is listed as a contingent beneficiary of a life insurance policy, investment accounts, or other financial accounts.
The legal guardian oversees the proceeds a minor is awarded until they reach legal age. In some cases, the remaining parent is appointed the minor’s legal guardian, while other times, a court-appointed guardian will oversee the assets. The assets may be transferred into a Uniform Transfers to Minors Act (UTMA) account. The guardian can only access the funds to make investments or use them for eligible expenses.
This means the minor’s access to the awarded assets will not be available until they reach the age of majority in their state, which can range from 18 to 21 years of age. This delays the distribution of proceeds; having a legal guardian appointed can generate legal fees and be time-consuming. There are alternatives available that still allow children to receive assets from their parents.
Instead of naming your minor child as a contingent beneficiary of an account, create an irrevocable trust and appoint a minor as one of your trustees. Your trust can own the insurance policies or financial accounts you have. Upon your death, the proceeds of these accounts are given to the trust. The trust will not appoint a legal guardian.
If you name your minor children as trustees, they can access the funds immediately. This can help them pay for their education and other needs before they reach the age of majority. A trust allows you to specify how the proceeds are distributed. Having a last will and testament is also important because it enables any remaining assets to be transferred into the trust after death.
You can also place assets in a 529 plan to set aside funds for their future educational needs. This allows you to prepay college tuition or open investment accounts with the proceeds awarded to your children. These plans also offer tax benefits, including a deduction for contributions to the 529 plan from your income taxes.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.