1. Life insurance and financial accounts generally have beneficiary designations forms you fill out when you open the account. Who you state as your beneficiary on these forms is to whom that account goes, regardless of what you state in your Will.
2. Don’t list your young children as outright beneficiaries on these forms.
3. Instead, use “trust” language, taken from your Will.
4. Don’t worry- this is a straightforward and inexpensive solution.
Do you currently have your children or other minors named outright as beneficiaries on your investment accounts or insurance policies?
For example, after your spouse, you list your children as:
Joe Smith, 50% and Jane Smith, 50%
Oops! You don’t want to do that!
Minors generally cannot own property and financial accounts outright. As a result, if you die before your child turns 18, the court appoints a guardian (not automatically the surviving parent) to manage these assets until the minor turns 18, at which point the minor has full access and control. In other words: bureaucracy, court fees, and 18-year-olds flush with money may result! Furthermore, if you leave qualified assets such as 401(k)s and traditional IRA(s) outright to minors, higher taxes may also result.
So, instead, do these 2 things:
1. Fix Your Will. Include language in your Will authorizing a trust, and then,
2. Fix your Beneficiary Designations. Reference that language on your assets’ beneficiary designation forms.
Don’t worry- this is neither complex nor expensive.
What the trust does:
If both parents die when the child is young, the trust can help:
- Protect your children in a catastrophic event.
- Ensure your children’s inheritance money is used wisely— i.e. on college, not parties.
- Avoid court intervention.
- State who you want to be your child’s guardian. Otherwise, grandparents are generally the default if both parents die.
You’ll have a choice between 2 types of trusts:
1. Children's Trust
For most parents, I recommend a children's trust, which is flexible and inexpensive.
2. UTMA Trust
For most other situations, I recommend a trust created under the Uniform Transfer to Minors Act (UTMA); it’s less flexible and customizable, but it is simple and generally included in your will at no extra cost.
The Bottom Line:
With a bit of effort and minimal cost (you needed that Will done anyway, right?), you can avoid the legal and tax pitfalls that often result from unintentionally problematic designations on your financial accounts and insurance policies.
One final thing about financial accounts…
Finally, when you check your bank and brokerage accounts that are held jointly, look at how they are titled— Tenancy in Common (TiC) or Joint Tenancy with Rights of Survivorship (JTWRS). This really matters! If any of the accounts are held as JTWRS, the other person listed as account holder gets the entire account at your death, regardless of what you put in your Will. Make sure that this matches your intention for those assets.
Alerian Hall is an estate planning attorney in Seattle, Washington and is of counsel to Insight Law. Alerian Hall’s financial expertise (she was previously a financial advisor) enables her to provide a truly comprehensive and tailored estate plans for her clients. Insight Law is a tax planning firm with 4 locations in the greater Seattle area. Visit insightlawfirm.com to learn more and to schedule an appointment.
This article is for general informational purposes only and does not constitute legal advice.
Author: Alerian Hall
Estate Planning Attorney