When parents name their minor children as beneficiaries on life insurance policies or property deeds, they're acting out of love and good intentions. However, this well-meaning decision can inadvertently create a legal obstacle course that makes accessing those funds surprisingly difficult when they're needed most.

The Problem With Minors Inheriting Directly

Here's what many parents don't realize: minors cannot legally own property beyond a small threshold amount, which varies by state but is often just a few thousand dollars. When a child inherits a life insurance payout of $250,000 or receives property through a beneficiary designation, the law doesn't allow them to simply receive and manage those assets.

Instead, the court must appoint a Property Guardian to manage the inheritance until the child reaches adulthood. This isn't the same as the guardian you named in your will to raise your children. This is a separate court process specifically for managing the child's financial assets.

What Does a Property Guardianship Actually Mean?

Once the court appoints a Property Guardian (often the surviving parent), that guardian must ask the court for permission every time they want to spend money from the inheritance for the child's benefit. Need to pay for braces? Court approval required. Want to use the funds for college tuition? You'll need a judge's permission. Planning to cover medical expenses? That requires filing a petition with the court.

Each request typically involves legal fees, court costs, and waiting periods. The guardian must also provide detailed accountings to the court showing how every dollar has been spent. This process continues until the child turns 18, at which point they receive whatever remains in a lump sum, regardless of their maturity level or financial readiness.

A Common Scenario

Imagine a father who names his two young children as secondary beneficiaries on his $500,000 life insurance policy, with his wife as the primary beneficiary. Tragically, both parents die in an accident. The children's designated guardian now faces a difficult situation: to access the $500,000 meant for the children's care, education, and living expenses, she must petition the court for a Property Guardianship, then seek court approval for ordinary expenses throughout their childhood.

A Trumbull will lawyer would have suggested a different approach: creating a trust to hold those assets with clear instructions about how funds can be used, eliminating the need for ongoing court involvement.

Better Alternatives to Direct Inheritance

The solution is straightforward: instead of naming minor children as direct beneficiaries, parents should create a trust within their estate plan and name the trust as the beneficiary. The trustee you select can then manage and distribute funds for the children's benefit without court supervision, following the guidelines you've established.

This approach offers flexibility, privacy, and significantly lower costs compared to ongoing court-supervised guardianship. You can also specify how and when your children receive distributions, rather than handing them a lump sum at age 18.

Taking Action

Review your beneficiary designations on life insurance policies, retirement accounts, and property deeds. If your minor children are listed as direct beneficiaries, it's time to update your estate plan.

If you need assistance creating a trust structure that protects your children's inheritance or want to review your existing beneficiary designations, we invite you to schedule a consultation with our office at 203-877-7511 to discuss your personal situation. Mention this article when you call, and we'll help ensure your children's financial future is protected without unnecessary court complications.

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