What If My Beneficiary Can’t Claim My Life Insurance Money?

Last will and testament

Many people purchase life insurance policies to provide for a spouse and children. But what happens if your death arrives while your children are still minors? In that case, the life insurance company cannot pay out benefits until the court appoints a guardian for your minor children. That can be a lengthy process, requiring attorney fees and court costs. Similar problems could arise if your life insurance beneficiary is an incapacitated person.

Naming A Custodian Under The Uniform Transfers To Minors Act (UTMA)

One solution if your beneficiaries are minor children is to name an adult person you know and trust as custodian of your life insurance death benefits under the Uniform Transfers to Minors Act (UTMA). Our experienced agent can help you name a custodian and set up a UTMA account. With these measures in place, if you should pass away when your children are minors, the custodian you named would manage the proceeds of your life insurance policy until your children reach legal age, at which point they will receive the balance of the funds.

Establishing A Trust

A trust can hold money and property for your beneficiaries, and it offers more flexibility than a UTMA account. It can be used to appoint a trustee to oversee your life insurance funds and other assets and to dictate how you want those funds to be used and your assets managed. When you purchase a life insurance policy, instead of naming your children as your beneficiaries, you can name a trust and a trustee.

The legal age of adulthood is 18 or 21, depending on the state. If you have a substantial life insurance policy, you may not want your children to receive that large amount in one lump sum at such an early age, when they lack experience with managing money. This concern can be resolved by establishing a trust to receive the death benefits from your life insurance policy. A trust can be set up to provide for your children, including their college educations, and to distribute the remaining funds to them when they reach a specific age, such as 25 or 30.

Your trust can be revocable or irrevocable. If it is revocable, you are allowed to make changes or terminate the trust during your lifetime. If it is irrevocable, it can help shield your heirs from estate taxes. Generally, federal estate taxes are only a concern for very high-value estates.

Special Needs Trusts For Disabled Beneficiaries

If your child or other life insurance beneficiary is disabled, setting up a special needs trust could be your best option. Disabled individuals may need supplementary financial support throughout their lifetimes. To qualify for government assistance, individuals with disabilities are limited as to the number of assets they can hold in their own names. A special needs trust can hold your life insurance proceeds for a disabled beneficiary without disqualifying that person for assistance from federal and state programs such as Supplemental Security Income or Medicaid.