Nicole: It’s very common for people to put their minor children as beneficiaries on their life insurance, for example. While that seems like a good idea, it actually is not because minors cannot inherit. If something happens to you while your kids are still minors, that money will be held in trust at the court and a conservator would be appointed for your children. The problem with that is that it’s very, very hard to get access to that money until your kids reach 18, sometimes 21.

Cristyn: Other problems with the money that’s held in the court process– We call it a conservatorship. First off, we have to set up the conservatorship. The court’s going to appoint someone to manage your child’s money, maybe a relative, maybe not. There’s fees associated with that, including attorney’s fees, especially if an attorney or another professional is appointed. The person gets brought back annually to check in and do reporting on the child’s money to make sure it’s being managed properly. Right there, we have a lot of administration costs being assessed just to your child’s inheritance. We’re losing money. Your child is losing money.

The second problem is that once the conservatorship is set up, that money is sitting essentially in a bank account. Whereas when we put money in a traditional trust like the ones we set up every day for our clients, that money can be invested. Money that’s inherited this way, it has to require the conservatorship be set up for the minor. It’s not going to be invested. It’s going to be sitting in a bank account, which depending on how you view inflation, it’s actually going to be losing money over time.

Inflation has not kept pace with savings account rates. Your child’s money, not only are we losing money to administration costs, now we’re losing money that could have been invested. Now we have to deal with the fact that inflation is causing your child to have even less money than he or she should have. What are the other drawbacks of listing minors as beneficiaries?

Nicole: The other problem is that most of the time people don’t want their 18-year-old or their 21-year-old to be receiving a large inheritance all at once. Most people think back to the financial decisions that they were making when they were 18, and they cringe about it. We don’t want our own kids doing that either. Instead of having your kid inherit all at once, get a trust and incrementally distribute the proceeds differently.

Cristyn: Another problem that we have to address when we have 21-year-olds inheriting is the fact that it’s not going to make it 12 months. There are statistics where the money is gone within 12 months for the beneficiary, almost regardless of the sum they inherit. Whether it’s a $1,000, a $100,000 or more, the money’s going to be gone very quickly. Like Nicole said, trust allow you to spread that out over time.

Again, I would really encourage anybody who’s thinking about their own children, even if your child’s already 21 and they’re already legally, technically old enough to inherit, should they? Should they inherit it as opposed to putting something preventative in place, giving them multiple opportunities to learn from mistakes rather than giving a 21-year-old a free pass?

Another problem that I have encountered when we have beneficiaries who are too young, who do inherit a lump sum, is it causes them to not get an education, whether it’s trade school, university, community college, doesn’t matter. They’re no longer on the path for education if that’s what they were destined for before the inheritance, or they now have no work ethic because they have this money. $1 million when you’re 21 seems like all the money in the world. You never need to work again.

As adults, we realize that is not true. $1 million is great. I’m not going to balk at getting $1 million should anyone want to give that to me. However, I know that I need to continue working. If that $1 million is being doled out slowly over time with restrictions in place and when I’m older and can understand and have had time to develop a career, start a business, get an education, whatever that looks like, the money is just much better protected.

Nicole: I think another problem too with putting minors as beneficiaries is, okay, they’ll be receiving it all outright at 18 or 21, but what if your kid is 15 and breaks his leg and needs extra money for medical expenses? It’s really hard to get access to that money from the court before they reach 18 or 21. It’s not as easy as if you have a trustee managing it saying, “I need money because he just broke his leg.” “Here it is.” That’s also another problem with minors as beneficiaries.

Cristyn: Yes, getting the money from a trust is absolutely easier. One last thing I want to hit is the people who realize we can’t put minors as beneficiaries on the account, so they say, “Ah, let me put my mom.” Okay, first, I’m going to operate under the assumption that your mother, meaning your children’s grandmother, won’t steal from her kids. They do try. I have seen it in court. Okay. I’m going to operate under the assumption that there’s no thievery going on.

If mom becomes incapacitated and now inherits that money, it is a felony for the person in charge of managing mom’s estate and her affairs while she’s alive to give that money to anybody but for mom’s benefit because that money is now mom’s. Doesn’t matter that it would’ve been clearly otherwise, you’d have to go to a court battle to fight it out to prove that.

The other possible scenario is mom inherits the money and then passes away. Mom’s money. Now it’s going to skip the grandchildren. It’s going to go to follow her estate plan if she put one in place. If she didn’t, it’s going to follow intestacy rules which could have your siblings inheriting part of it. Maybe your kids get a fraction. It just turns into a mess. Rather than do it yourself lawyering, it’s worth picking up the phone, making a call, finding an estate planner near you to best protect your children and young adults.

[00:05:58] [END OF AUDIO]