For most of us, a surprise is a good thing. For an estate planning/elder law lawyer, they are dreaded. Most people think (properly) of life insurance as a safety net for their family. Young families have gotten the message and usually protect their children by buying low-cost coverage to be sure their children are protected in a tragedy. To be sure they set it up correctly, they follow their agent’s instructions to name their spouse as their “primary” beneficiary and their children as their “contingent” or “alternate” beneficiaries, and then leave it there. Here is the unwelcome surprise: if something terrible happened to both parents, that money would be largely “stuck” until the child turns 18, at which time they get it all without restriction? Do you think that is a good plan?
Surprisingly, most insurance agents do not raise this important issue – largely because they are not taught it by their companies. Whenever I speak to agents, I’m sure to educate them about it. In one case I handled, the couple had divorced and the wife had primary custody of the 13 year old daughter. The wife died suddenly. She had a substantial insurance policy naming her daughter because she wanted to be certain her irresponsible ex husband did not get the money. Well, as surviving parent, he recovered custody and authority over her funds, which were paid into the registry of the court. When the daughter reached age 18, she got all of the remaining money without restriction. The result was the shocking opposite of what her mother had wanted.
So, the question is: how to provide for your children with life insurance, without creating unnecessary restrictions or risks? The answer is fairly simple, but takes a bit of planning. The parent(s) should create a Will or Revocable Living Trust which will contain a trust for their children within it. You name a trustee, usually a dependable friend or family member, to manage the money and make the decisions for your children. A good example would be that the Trustee could authorize and pay for college tuition, but could prevent the child from spending on unnecessary luxuries. Of crucial importance is that the funds are immune from the child’s creditors, if it is properly set up. That way, even bad choices by a young person will not result in losing their trust funds. Another wonderful feature is that the parents can impose any restrictions they feel are prudent, such as limiting expenditures to only health and education. Crucially important is the opportunity such trusts give parents to regulate when the principal gets distributed. For example, you may feel your children will be sufficiently mature to manage their own money without the help of the Trustee by the time they finish college and are ready to launch, around age 25. Or you may want to “stage” the payouts over a longer period of time. The key is that you control the terms of the trust. So, say you’ve got a $500,000 insurance policy and two young children, which plan do you prefer: all the money to the court until age 18, and then full distribution to your teenagers; or something far more thoughtful, designed to address the unique needs of your children, with people in charge you choose?
My point is – you’ve probably done a good job in providing for your children through your savings, retirement accounts, and life insurance. But if you have not created a Trust, normally within a Will or Revocable Living Trust, to receive, manage and distribute that money for their best interests, then your job is unfinished. Once we create the documents, then we will instruct you how to modify your beneficiary designations to be sure all the money pours into the trust. That’s the final, necessary step. Then, I guarantee, you will rest easier, knowing you have set up a plan that will provide for your children (or grandchildren for that matter) for the long term, no matter what happens.