Question: I want to designate my grandchildren as the beneficiaries of my retirement accounts and life insurance policies. Currently, they are ages 4 and 6. Is this possible? Can I simply complete a new designated beneficiary form with my financial institutions?
Answer: You can absolutely designate minor children to receive money under retirement accounts and life insurance policies. However, you NEVER want to designate that the child receive those monies outright. In other words, you would not simply fill out the child’s name and information, like you would an adult beneficiary. This is because New York law does not permit transfers of this kind to a minor unless the money is directed to a custodian or to a trust for the benefit of the child.
If you were to leave these accounts directly to the child, upon your demise an adult would have to petition the court to become a property management guardian. This is the case even if the child has living parent(s). Once appointed, the guardian could collect the funds and hold then hold them in a savings account for the child until they reach the age of 18. Once the child turns 18, the funds must be turned over to them.
Aside from the cost and delay of a court proceeding, the guardian may not receive the power to invest the monies or take distributions from retirement accounts. Rather, all funds would have to be cashed in and put into a savings account, representing a potential loss of thousands of dollars had the monies been invested. With retirement accounts, this is particularly detrimental since the account would have to be cashed out and would lose the benefit of the tax-deferred over the course of your young beneficiary’s life expectancy.
One way to leave assets to a minor is to create a custodian account under the Uniform Transfers to Minors Act (“UTMA”). UTMA allows funds to be held by an adult custodian until that beneficiary reaches 21 years old (18 if the account was set up before January 1, 1997), at which point the beneficiary is entitled to do anything he or she wishes with the account. The custodian can access the funds prior to the child’s age of majority for limited purposes.
The better way to leave assets to a minor is to create a trust for their benefit, either during your lifetime or in a last will and testament. The benefit of using a trust is that it can provide for creditor protection, tax savings when the beneficiary passes away, and freedom to select a Trustee who can manage, invest and spend the money for the beneficiary with less restriction. You can also decide whether or not you want the beneficiary to become a Co-Trustee or sole Trustee when they reach a certain age. If the trust is receiving retirement accounts, it should be drafted to include provisions to accept those kinds of accounts in the most tax efficient manner. This trust can be created during your lifetime or in your Last Will and Testament.
Whatever you choose, be sure to consult with an experienced Trust and Estate Attorney to decide the best way to achieve your goals.
- Nancy Burner, Esq.