How to Figure Out Life Insurance Beneficiaries as a Single Parent

Many people name their spouse or partner as a life insurance beneficiary, but this doesn’t always work for every family. Single parents may face complicated considerations about who will take care of their kids and manage their family’s finances if they pass away.

Taking steps now to set up accounts and outline your plans can help leave clear instructions for your loved ones. Some extra effort now can give you peace of mind that the money from your policy will go where you envision.

Who Manages Life Insurance Money on Minor’s Behalf

A challenge of choosing a life insurance beneficiary as a single parent is that minor children can’t inherit money and property directly. The money needs to be in some form of trust or custodial account, managed by an adult, until the child reaches legal age. The exact age varies by state, but typically the child will take control of the account at age 18 or 21.

For some life insurance policies, it may be possible to name a minor child as your primary or contingent beneficiary. However, if you die, the life insurance company can’t give the money to your child because minors can’t inherit directly. Instead, a court would need to get involved to designate a financial guardian of the money. Essentially, when setting up your life insurance, your options include:

• Naming your child as beneficiary and letting the court appoint a financial guardian or custodian and order the creation of an appropriate financial account.

• Setting up a trust or custodial account for your child and list the trust as your beneficiary.

• Naming another adult as beneficiary, hoping they spend the money on your kids and not

  on themselves.

If you pass away, the court’s role is to act in the best interests of your child, and often that means keeping kids with their surviving biological parent. In other cases, there may be other people who step forward to take care of your kids, such as a person you specify in your will. The court may also appoint a guardian or custodian to manage funds on your child’s behalf until they come of age. Again, your child’s biological parent may be a likely candidate to take care of this, even if you and your former partner have a bitter relationship.

Choosing one person to be your child’s guardian and another to manage the financial side can help you establish checks and balances to help ensure that money’s being used according to your wishes. However, this can add bureaucracy and complexity, especially with smaller estates. You should think about—and potentially consult with a lawyer about—what makes the most sense for your situation.

How Guardians Work With a Trust or Custodial Account

As a single parent, you create your own family between you and your children. Other people don’t have the same perspective as you do on the inside. Even if you’ve had conversations with loved ones, a written plan removes the burden of remembering all the details.

For many parents, a revocable living trust can be an option to explore. You can put assets into a revocable trust now to help avoid some of the cost of the probate process and get property to beneficiaries faster. Another option is to set up a testamentary trust, which you create in your will to go into effect only after you die. Potential downsides include the cost of setting up and managing a trust, and complexity compared to some wills.

A trust allows for detailed instructions. For example, if you want your child to attend a private school, you can leave instructions to use some of the money for tuition. Alternatively, you could specify that you don’t want any trust money used for a religious school. While the guardian will still make the ultimate decision about where your child attends school, they’d need to use their own money for decisions that doesn’t align with your instructions.

How guardians access trust funds

The trustee is the person responsible for managing and distributing money in the trust. Generally, if your child’s guardian is not also the trustee, they’ll have to work with the trustee to access the money. For example, they may contact the trustee to request funds they need. The trustee would then review instructions in the trust. You might have clear guidelines for what is or isn’t a good use of the money, or instructions might allow the trustee to use their discretion.

Sometimes, people set up trusts with instructions for how to distribute money for the child’s healthcare, basic support, education or other everyday expenses. A trust can offer a wide range of options, but it can be complex, so it’s important to work with an estate planning attorney to set up plans that fit your needs.

Trust vs. UTMA

A UTMA (Uniform Transfer to Minors Act) or Uniform Gifts to Minors Act (UGMA) account is typically much simpler to set up than a trust. Once your child turns 18 or 21, they take full control over the funds and can use them for whatever purpose they wish.

One consideration to keep in mind is the potential pressure or temptation of getting access to what might be hundreds of thousands of dollars. A UTMA or UGMA can be an option for some children as they start their adult life. Others may not be ready to manage a large amount of money responsibly at a young age.

There can be a delicate balance to walk between providing a financial cushion for your loved ones and giving them more than they’re ready to handle.

You might have options with some trusts to defer the age at which your child takes full control of the money. You might prefer to open a separate UGMA to give them access to some funds sooner, or you might choose the freedom and convenience of an UTMA over a trust. Again, an estate planning attorney or similarly qualified expert can help you weigh pros and cons to decide what’s right for your family.

Should You Make Your Child’s Guardian a Beneficiary?

Some single parents may have important emotional reasons to have the person managing money be different from the child’s caregiver, such as an unamicable divorce. In some cases, a nurturing, loving guardian may not have excellent money skills, so you’d want someone else with greater financial strength managing a custodial account. But in cases when your child’s guardian is also someone you trust financially, is it easier to name that person as beneficiary instead of dealing with the complexity of a trust?

One of the advantages of a life insurance benefit is that there aren’t restrictions on how you can use the money as a beneficiary. But in terms of being a single parent, this feature means you won’t be able to name an adult beneficiary on your policy and then set limits for them to use the money for your kids. As beneficiary, the person you choose would have full control over the benefit.

Even if you discuss plans in advance, a guardian would not have any obligation to use the money for your children. And if your preferred guardian is unable to take care of your children for any reason, matters could get even more complicated to resolve. The most secure way to make sure your kids benefit from your life insurance is to work with a professional and set up accounts for your children’s future.

Set Your Plans in Writing

You may have already had conversations with loved ones about what should happen if you pass away. If you haven’t set your wishes in writing, that should be a priority in your financial and estate planning. Leaving clear instructions can help avoid miscommunication when you’re no longer there to explain your intentions.

Thinking about the future now can help you feel assured that you’re choosing the right people to look out for your loved ones and leaving them a clear plan to follow.

Fabric by Gerber Life and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction

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