“Technically, you're allowed to name your minor children as beneficiaries,” says Matt Lyon, USAA advice manager. “But you should be cautious before doing so.” According to Lyon, parents can achieve their life insurance goals without naming their minor children as beneficiaries — and that's usually for the best.
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.
Do Not List Minor Children as Account Beneficiaries. In the vast majority of states, minors may not inherit money or sign legal documents. Therefore, when you name a child, the payment may only be made to a court-appointed guardian. Appointing a guardian takes time and will delay any payments to the children.
And you shouldn't name a minor or a pet, either, because they won't be legally allowed to receive the money you left for them. Naming your estate as your beneficiary could give creditors access to your life insurance death benefit, which means your loved ones could get less money.
A lot of people name a close relative—like a spouse, brother or sister, or child—as a beneficiary. You can also choose a more distant relative or a friend. If you want to designate a friend as your beneficiary, be sure to check with your insurance company or directly with your state.
Although it's common for people to name one of their children as their executor, you don't have to. In some situations, it's better for you to choose another person for this important role.
If your parents or another family member cosigned a mortgage, student loan, or car loan, naming them as a beneficiary will help them shoulder the financial terms of the agreement if you were to die. Additionally, consider who would be likely to take the lead in funeral arrangements for you.
Life insurance
The second way is with life insurance. It allows you to leave an inheritance without your beneficiaries having to pay income tax on the money they receive. So if you buy a policy with a $250,000 death benefit, your heirs will actually get $250,000.
Most life insurance policies have a default order of payment if you do not name a beneficiary. For many individual policies, the death benefit will be paid to the owner of the policy if they are different than the insured person and still alive, otherwise it will be paid to the owner's estate.
When you enroll in a 401(k), you need to name beneficiaries to inherit your 401(k) if you die. Naming beneficiaries can keep your 401(k) out of probate court. You can name almost anyone as your beneficiary. such as your children, your parents, siblings, a friend, or your favorite charity.
If an inheritance is left directly to a minor without any arrangements in place, a probate court may need to appoint a guardian to manage the inheritance until the minor reaches the age of majority, usually 18.
It is important to note that capital assets given during life take on the tax basis of the previous owner, when these assets are given after death, the assets are assessed at current market value. This may cause loved ones to miss out on tax benefits, such as a step-up in basis after your death.
If you have any financial ties to your sibling, you won't have any problem listing them as a beneficiary. You might name a sibling as your beneficiary if they: Take care of your aging parents.
If your oldest isn't financially savvy, organized, responsible, fair and living close by, you could be unduly burdening them – and your other children – through this appointment. Ultimately, it's better to pick “the best person for the job” as your executor, rather than rely on custom.
While it is most common for a spouse to be named as a primary beneficiary, as we've already discussed, you can of course name a child to be first in line to receive assets from your estate.
One of the main disadvantages is that an asset that could typically pass directly to persons outside of probate may now become an asset that has to be addressed through the probate process. This can create a long delay before those assets get to your loved ones.
That said, in addition to having a Will and Trust set up, you really should also have your bank accounts set up to include beneficiaries. This way, you can take as much of the headache as possible out of the process your loved ones will have to go through after you pass away.
Given the magnitude of the responsibilities and the intimacy of the role, you may want to name a close friend or relative as executor, someone who fully understands and respects your wishes, as well as those of your beneficiaries, and who might handle your sentimental heirlooms and other property more sensitively than ...
An executor can also be someone you've named as a beneficiary in your will. The role of an executor is a serious one which carries a lot of responsibility. When choosing your executor or executors you need to bear this in mind. It should be someone you trust to carry out this work.
Serving as an executor or trustee is a significant responsibility that requires careful consideration. While there are benefits, such as personal satisfaction and potential compensation, there are also drawbacks, including time commitment, emotional strain, and potential legal liability.
Pros and cons of designating a minor child as a beneficiary
This can give them the financial help they need once they become a young adult. The main disadvantage, however, is that your child won't have access to the money until they turn 18 or 21, depending on your state.
The primary disadvantage of naming a trust as beneficiary is that the retirement plan's assets will be subjected to required minimum distribution payouts, which are calculated based on the life expectancy of the oldest beneficiary.
Beneficiaries of an inheritance in California typically do not have to pay income taxes on the inherited assets. That is because inherited assets are generally not taxable income for individual beneficiaries.