Revocable Living Trusts and Children as Beneficiaries of Life Insurance

Client’s often tell me that they have named their spouse as the beneficiary of their life insurance policy and then their child as the backup beneficiary. This is very common.

There are a few things to consider if you currently have your beneficiaries listed this way.  If your child is a minor when the second spouse dies then a legal guardian must be appointed by the court to oversee the child’s inheritance.  You have no say in who the guardian will be. The guardian then holds the money for the benefit of the child until the child reaches the age of majority (18 years old in Massachusetts).  As you may know, the appointment process can be time consuming and costly and can prevent your child from being able to use the money right away.

Your child will then receive the full amount of the life insurance policy at 18. If your life insurance policy is, let’s say, a million dollars, then your 18 year old will be inheriting one million dollars outright at the age of 18. That’s 18 years old with a million dollars!  I have big hopes and dreams for my daughter  (Edit: I now have three daughters!).  I hope that she is grounded enough and mature enough to be responsible with new found wealth at 18 years old.  However, I am also a realist.  People don’t always make the best life decisions during this phase of their life.

One option is to create a Revocable Living Trust and then name the Trust as the beneficiary of the Life Insurance policy.  This allows your minor child to avoid the guardianship process and allows you to choose who you would like to oversee the money and provide specific instructions as to how that money should be spent.  It also allows you to control at what age your child has full control over the money.  You have the ability to keep the money in trust for the child and protect her from future creditors, divorce, bankruptcy and lawsuits.

The bottom line is you can control your children’s inheritance but you need to plan ahead for it.  Speak to a qualified estate planning attorney to learn more about Revocable Living Trusts and how they can benefit you.