In California and elsewhere, naming beneficiaries to bank accounts and other assets is a common approach to avoiding probate. While this can be a prudent practice for some individuals, this tactic can prove problematic for those who pass away while their children are under 18.
The impulse to name children as beneficiaries is understandable, particularly for single and divorced parents who are the sole source of support for their children and who are trying to avoid probate. However, minor children who are named as beneficiaries on bank accounts, insurance policies and other assets will endure other expensive problems if they are faced with the need to collect their inheritance.
Naming children as beneficiaries adds expense, complexity and risk
Financial institutions will not release money to minors without a guardian or court order. In California, the cost of initiating a guardianship case or obtaining an order under the Uniform Transfers to Minors Act is more than $400, not including attorney’s fees and other costs. Even a surviving parent may not necessarily have the right to access such funds without court approval.
These expenses can escalate when more than one child is involved. In order to avoid the high cost of posting a bond, it is typical to deposit the minor’s funds in a locked account that earns minimal interest, thus limiting any investment opportunities for the children’s estate.
Later when the child turns eighteen, a new potentially serious problem may arise: A teenager who lacks the maturity to properly manage wealth may suddenly have unfettered access to the estate. Parents are right to be concerned about the potential problems that can arise from giving too much, too quickly to their young heirs.
| Proper estate planning can keep your estate out of probate, saving time, money and headaches for your loved ones. To learn more about estate planning, click here to read our California estate planning FAQ. |
| Estate planning and probate are easier to understand when you learn the terminology. Learn more by clicking here for our glossary. |
Using a living trust to avoid the named beneficiary problem
By establishing a living trust with the trust itself or an adult trustee as the named beneficiary on accounts, the process of obtaining the estate proceeds from financial institutions is greatly simplified. With the minor’s funds deposited in a custodial account, the trustee will then be free to manage the funds on the minor’s behalf according to the dictates of the trust, all without court interference.
A trust can also provide oversight for the funds beyond age 18. For example, the trust could bar the release of funds to an adult child who has unpaid creditors, chemical dependency issues or other problems. Maintaining restrictions on the funds can be preferable to handing a large blank check to a young adult.
To learn more about living trusts, please click here for The Honest Lawyer’s discussion of living trusts.