Never Name Your Child as a Beneficiary

Why You Should Never Name Your Child as a Beneficiary

Picture of By: Shannon McNulty, Attorney, The Village Law Firm

By: Shannon McNulty, Attorney, The Village Law Firm

Shannon's work is sophisticated and reflects her deep knowledge of the laws governing estates, taxation and child guardianship issues. Shannon approaches each client with sensitivity and compassion, understanding that many of the decisions that they will have to make can be difficult.

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One of the most common mistakes we see New York parents make is naming a minor child as a beneficiary on a life insurance policy or retirement account, or naming them as beneficiaries to inherit assets directly under your will.

Children under the age of 18 are not legally capable of managing assets themselves, so assets inherited by the child are supervised by the court until the child turns 18.  The court appoints someone to administer the assets on behalf of the child, who is often – but not always – the child’s guardian (Check out our Five Tips for Choosing a Guardian).  This person is called the guardian of the property.

Naming Your Child as a Beneficiary Can Saddle Your Child’s Guardian with Burdensome Legal Obligations.

The guardian of the property has many legal obligations.  This person must obtain permission from a judge to buy and sell certain assets and may be required to obtain permission before using the money for the child.  This not only burdens your child’s guardian with costly and tedious legal filings; it also can put financial pressure on the guardian if the court doesn’t approve requested expenses.    

Naming Your Child as a Beneficiary Can Violate your Child’s Privacy

The guardian of the property must also file annual reports with the court documenting the value of the assets being held for the child; the account numbers and the name of the financial institution where the funds are held; how much is spent each year; and the goods or services on which the money has been spent.  For example, a report might specify how much was spent each year on the child’s clothing, child care, and field trips – just to name a few items.

These reports become part of the public record, exposing detailed information about your children’s financial situation to public view and making them vulnerable to identity thieves and other predators.

Naming Your Children as Beneficiaries Can Create Inequitable Results

If you name your children as beneficiaries, the funds of the account or policy will be divided equally among all of your children, and the funds allocated to one child cannot be used for the benefit of your other children.  

While an equal division of assets can be fine in some situations, it can result in an unfair allocation if one child incurs large medical expenses as a result of injury or illness.  

Suppose one child is 16 and the other is 21 upon the death of the parents.  In this scenario, the 21 year old may have had his entire college education paid for, while the child who is 16 will have to use a large chunk of her inheritance to pay for her education.  This can result in a discrepancy of hundreds of thousands of dollars.

In another scenario, one child might develop a disability or other medical issues.  The child’s medical or therapeutic expenses could deplete that child’s account without affecting the other child’s inheritance.

As a parent, you provide financial support to your children based on each child’s needs, not on a strictly equal basis.  Leaving your assets in a court-supervised guardianship doesn’t allow the individuals caring for your children to make those same adjustments.  They are legally restricted from using assets allocated to one child for the benefit of one of your other children, even if doing so would result in a more just distribution.

Naming Your Children As Beneficiaries Can Set Them Up to Have Access to a Large Amount of Money When They Turn 18

Another problem with a court-supervised guardianship is that your children may receive access to a large sum of money at a young age.  When your child turns 18, he or she must petition the court to lift the guardianship, and all the remaining assets are then transferred to the child’s name.  

Is it a good idea for an 18-year-old to be handed a large sum of money with no supervision or restrictions?  Probably not, but that is exactly what can happen if you leave assets to children directly.  Having access to money at a young age can result in a slew of problems.  Squandering an inheritance, developing a poor work ethic, and becoming the target of predators and con artists are all more likely when a young person is given premature access to a substantial sum of money.

The Right Way to Leave Assets to Children

Fortunately, these problems can be avoided with proper estate planning.  Instead of leaving assets directly to your children, you should leave them to trust for your children’s benefit.  A trust can prevent ongoing court supervision of your child’s assets, make things easier for your guardian, allow for an equitable use of the funds, and protect your child from privacy violations and the problems that can come with receiving an inheritance at a young age.

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