Beneficiary mistake #2: Minor or Spendthrift Children

Many assets allow you to name a beneficiary, that is, whom you would like to receive the asset in the event of your death. Life insurance policies and retirement accounts are common examples but some other account types such as bank accounts and non-retirement investment brokerage accounts also may allow you to name beneficiaries through a Pay on Death (POD) or Transfer on Death (TOD) form. While these forms are generally straight forward, they often lead people to make inadvertent errors. We have identified six common mistakes people make when preparing for the distribution of their assets after death. This is PART TWO OF SIX.

Naming minor children
Most people who have children wish to leave their assets to their children after their death. It is important to consider the age and financial responsibility of the children before choosing to leave funds to them outright. In most states, the age of majority is between 18-21. That is the age when a child who is left assets as a minor can have claim money outright. Most parents find that 18- to 21-year-olds (and even some much older children!) do not have the maturity or financial savvy to handle large sums of money at such a young age. If you are concerned about your child spending your assets irresponsibly, you may want to consider establishing a trust to receive the assets for the benefit of the child until they reach an age at which you feel they may be more responsible. The trust can be established at the time of your death (called a testamentary trust) and would name a trustee to administer the funds until the child reaches whatever age you determine would be appropriate for them to receive the funds outright. Prior to that time, the trustee would have discretion to make distributions to the child(ren) prior to that pre-determined age for expenses related to their education, health, and maintenance. But the children would not have the legal right to receive funds outright until the age you have determined. This can also be used for older children who are spend thrifts or have problems with addiction where you may be concerned about how they will handle the funds.

Example: John and Jane Doe have an estate worth approximately $1 Million. In their wills, they direct that all of their assets be paid to a trust for the benefit of their son, Jake. They name John’s sister, Jill, as trustee. They stipulate that Jake is entitled to 1/3 of the trust at age 25, 1/3 at age 30, and 1/3 at age 35. John and Jane both die when Jake is age 20 and all of their assets go into a trust that is established. Jill can give Jake money each month to pay for rent on an apartment, money for a car, college expenses, medical bills, or whatever Jill feels is necessary for Jake’s well-being. At age 25, Jill will give Jake 1/3 of whatever funds remain in the trust at that time. The remaining 2/3 will remain under her control until age 30 when she gives him another 1/3, and so on.

Another consideration when it comes to minor beneficiaries is for those who are divorced and do not wish for their ex-spouse to have any access to their funds after their death. Account owners should be aware that in the event of the account owner’s death and he/she leaves assets to their minor child, the funds must go into a custodial account where a custodian is named. Often, this ends up being the guardian of the child, who is often the ex-spouse (the child’s surviving parent).

Anyone with minor children should meet with an estate planning attorney to review their options. If you do end up utilizing a trust, be sure you update any beneficiary designations to reflect the trust instead of the children directly. See “Mistake #1- Failing to Understand How Assets Pass On Your Death” to learn the importance of having beneficiary designations match the intentions of your will.

Being aware of this type of common mistakes can help you better prepare to ensure your wishes are followed in the event of your death. At Kramer Wealth Managers, we can help you coordinate with an estate planning attorney to make sure your estate goals and financial planning goals are in line with your personal WealthPath.

While the tax or legal guidance provided is based on our understanding of current laws, the information is not intended as tax or legal advice and should not be relied upon as tax or legal advice. Neither Osaic Wealth, nor its registered representatives, provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.

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Adrianna Rocha

Client Relations Specialist

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Adrianna Rocha joined Kramer Wealth Managers in 2021.

Adrianna is responsible for client experiences and service. As part of the customer service team, she strives to help and provide top-notch service to our clients. As part of her role, she communicates with clients through videophone, schedules client meetings, prepares and processes forms, and gathers information for our advisors.

Adrianna Rocha graduated with a Bachelor of Arts in Communication Studies from Gallaudet University in 2017. Before she joined our team, she worked in the customer service industry for nearly a decade. She excels in human-to-human relations and takes pride in not only her own accomplishments, but her clients’ as well. Adrianna enjoys chatting about her slight obsession with dogs, houseplants, essential oils, and food: especially Mexican food! She is also a proud fur-mama to her beautiful Aussie-mixed pup, Ziva.

Adrianna is not registered with Osaic Wealth.