Posted by Robert L. Arone
In 2019, there were over eleven million single parents with minor children in the United States. It’s likely that some of those single parents are among your clients. For single parents, making sure their children are provided for is probably the top financial and estate planning concern. They worry about whether there will be sufficient funds for the care of their children if something should happen to them. Purchasing a life insurance policy is a great option for many single parents, as they are likely the primary or sole source of support for their children. Their first instinct may be to name their children as the beneficiaries of their life insurance policies, but there are several considerations they should keep in mind, particularly if their children are minors. As their trusted advisor, you can help them think through their options, as well as help them determine the amount of insurance needed to provide for their children.
Can a Minor Be the Beneficiary of a Life Insurance Policy?
The answer is yes, but there are some very important caveats. Insurance companies will not pay out the proceeds of the life insurance policy to minors, so the parent needs to make arrangements for an adult to manage the money for the minor children’s benefit. If a plan is not put in place, and the parent dies while the children are still minors, the court will appoint a guardian to manage the insurance proceeds—and its choice may not be the person your client would have chosen. There are several options your clients can consider aimed at avoiding this problem.
Name a trusted adult as the beneficiary. The least complicated solution is for your clients to name an adult they trust as the beneficiary rather than the minor child. This adult beneficiary must be someone your client is assured will use the life insurance proceeds for the children’s benefit. The problem is that once this adult beneficiary receives the money from the insurance policy, he or she is not legally bound to spend the money for the children’s benefit, and there is nothing to prevent this individual’s current or future creditors from looking to the life insurance proceeds to satisfy their claims. In addition, if this trusted adult fails to create or update his or her own estate planning, ensuring the insurance proceeds go to your children at his or her death, the money may inadvertently go to that person’s creditors, spouse, children, or other heirs. So, although this is the simplest solution, it is very likely not the most advisable one.
Name a custodian. Many insurance companies require a custodian to be designated if a minor is named as the beneficiary of a life insurance policy—and it is a good idea to name an alternate custodian who can carry out this role in the event your client’s first choice is not available. The insurance company can provide your client with the necessary forms to name a custodian and set up an account under the Uniform Transfers to Minors Act (UTMA), which has been enacted in 49 states, or the Uniform Gifts to Minors Act, a similar statute enacted in South Carolina. The custodian will manage the money and can spend it for the benefit of the children as spelled out in the UTMA until they reach the age of majority (this varies from state to state but is typically age 18 or 21) or an age within a range set out in the state’s UTMA statute, e.g., between 18 and 25. The custodian, who has a duty to manage the property prudently, may or may not be the same person your client has named as the children’s guardian, who is the person who acts as their caregiver if your client dies: This really depends upon whether the guardian is adept at handling financial matters. Under some circumstances, it may make sense for the custodian of the life insurance proceeds and the children’s guardian to be two different individuals. If the children’s guardian is the client’s ex-spouse, he or she may not feel comfortable leaving financial decisions in their hands. Once the children reach the age of majority (or up to age 25 in some states), they will receive all of the funds from the account without any restrictions on its use. As a result, at that point, they could spend it irresponsibly or their creditors—future or present—could reach those funds to satisfy their claims.
Create a trust. Another solution that enables your clients to have control over how the life insurance proceeds are used is to create a revocable living trust naming the children as beneficiaries. The trust, rather than the minor child, can be named as the primary beneficiary of the life insurance policy. Your clients can establish terms in the trust specifying the purposes for distributions as well as the times when distributions can be made if they pass away. The trustee is bound to act in good faith and in the interests of the children who have been named as the trust beneficiaries. This is often the best solution for parents who want to ensure the life insurance proceeds are used for the children’s benefit but who are also concerned about whether an 18 or 21 year old will have the maturity to handle a large sum of money; the funds held by the trust can be distributed according to the parent’s wishes and are not required to be fully distributed when the children reach the age of majority. The trust can also be designed to protect the insurance proceeds from being reached to satisfy claims of the children’s creditors. A testamentary trust, created in a will, could also be used, but probate would be required in order for this trust to be established. Probate is a court-supervised process that is public and potentially lengthy and expensive.
How Much Life or Disability Insurance Is Needed?
As your clients’ financial advisor, you can help them think through how much life insurance will be needed to care for their children if they die unexpectedly. This responsibility is particularly pressing for single parents, as they are often the main or only source of financial support for their children. As you know, the amount of the life insurance should be sufficient to replace the parent’s income and cover expenses for the children’s care, as well as any additional amounts desired for expenses such as college tuition, a wedding, or the down payment for the children’s first home. You are in a great position to help them determine the amount of those expenses and take their other assets into consideration so they can make an educated decision about the proper amount of coverage. This will enable them to have the peace of mind that comes with knowing that no matter what happens, there is enough money to provide for their children’s needs.
Disability insurance is equally important for single parents. If they become disabled and are unable to work, they will need sufficient funds not only to cover their children’s expenses, but also their own. You can provide valuable advice based on your familiarity with the particular circumstances of each of your clients that will enable them to make a wise decision about how much disability coverage they should obtain.
Let’s Collaborate to Create a Comprehensive Financial and Estate Plan for Your Clients
Your clients, especially those who are single parents, depend on you to help them create financial plans that will enable them to meet their responsibilities and goals, including the care of their children. They are often the primary or even sole provider for their children, so every penny counts. You are best positioned to recommend products, such as life insurance, that will enable them to fund a trust or UTMA account for the benefit of their children. We can help implement the legal aspects of those plans, for example, by helping them determine the type of trust that is most appropriate for their personal circumstances and create trust provisions that will accomplish their goals. Together, we can create and implement the optimal plans for your single-parent clients so they can rest assured that their children will be provided for if they pass away or become disabled unexpectedly.