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(Minor) Children in Your Estate Planning

Travelers with Baby in StrollerWhen handling people’s estate plans, I am often asked how life insurance, retirement accounts, and other “beneficiary” property should be handled with regards to the young children. More often than not,  people with children want some or all of the proceeds of these accounts to go to their minor children.

For example, if a client has a $100,000 life insurance policy and has a minor child of 5 years old, she would most likely tell me or the insurance agent that she wants her child to be the beneficiary of the life insurance. The questions presented in this situation are:

  1. What happens to the money and any other property when her minor child inherits or receives it?
  2. Is there a better way to handle life insurance proceeds or other property that you want to leave to a child?

To answer the first question presented, let’s look at Oklahoma’s law on minors. Children or minors are legally incapable of holding and managing that property until the reach the age of majority, which, in Oklahoma, is the age 18. While they are still considered minors in Oklahoma, any property or money a minor owns must be managed by another person, such as a guardian or custodian. IMPORTANTLY, for the most part, the financial institutions will require the guardian to go to court and receive Letters of Guardianship  before the institution will release the funds into the guardian’s control. This applies to parents. Therefore, if a grandparent left a minor as a beneficiary of an account, the minor’s parent would have to go through the court process of Guardianship (which can be expensive), before the parent will gain control of the minor’s assets. This is an expensive complication to leaving an asset to a minor child, because court processes comes with attorney fees, accounting fees, filing fees, just to name a few.

In the above scenario, when the child turns 18, he or she can take over the management and control of the property or money. Oklahoma law generally does not require a specific level of financial literacy, planning, or common sense to manage or control your own property. Thus, the young teenager may squander the monies that was given to them very quickly, since they have full control of it once they turn 18. And how many 18 year old teenagers do you know that would know how to handle a lump sum of $100,000 responsibly?

THE GOOD NEWS is that there are other, more responsible approaches to leaving minors an inheritance. Rather than naming your child directly to receive the proceeds of a life insurance policy, or any other beneficiary account, you can set up a revocable or irrevocable trust that has your minor child as a beneficiary. This allows you to provide for appropriate use and management of the property with certain guidelines and control that will not let the minor child to squander their inheritance, and it won’t include any court process or fees. Unlike custodial arrangements discussed above, a trust does not necessarily terminate at age 18 and can continue to provide supervised management of the property into adulthood, including planning for education and other life-events. To read more about trusts, read a previous article by our attorney here.

The Trustee, or the person who manages the trust’s money and property, can also be empowered to use the Trust’s money for the benefit of the child, without the need and cost of court supervision. This can be helpful because it allows you to have more control over the types of expenses you want to provide for your child, including health, education, and general expenses one might occur as a young adult.

Remember, selecting a beneficiary for any type of monetary account is an important decision with potentially far-reaching consequences. There are important legal implications depending on your choice. Selecting a beneficiary is part of your overall estate plan, and the attorney at the Skillern Law Firm, PLLC can help plan for your minor children or grandchildren. Call our office at to speak to our attorney today!

Life Insurance And Your Estate Planning

Most people know what life insurance is and what it does for you. However, if you do not, let’s go over the basics. Life insurance is insurance that you can pay a monthly fee for that will pay a beneficiary an amount of money after you pass away. The amount of money paid at the time of death is known as the death benefit, and the expense of the monthly payment usually depends on the total death benefit amount.

Within life insurance, there are two major different types of life insurance: term life and whole life. Term life insurance has level premiums for a specified term of years, and then the premiums usually increase dramatically after the initial term (10, 20, 30 years). “Whole” or “permanent” life insurance commonly has level terms for life, and includes an investment element that can be used to reduce premiums,  purchase additional death benefit, or can be taken as cash dividends by the policy owner. Whole life insurance premuiums are more expensive then term life, but there are added benefits.

A life insurance agent can help you decide which policy or policies are best for you. However, estate planning attorneys are there to help make sure that your policy is effectively used in your estate plan, and help set up the best legal structure for the death benefit, as well as help you make a decision as to who should own the policy.

How is life insurance taxed?

Unless Congress or the State of Oklahoma changes the income tax law (which could very well happen in 2013), life insurance’s death benefit is usually received by the individual beneficiary income tax free. However, life insurance money can be subject to the estate tax and generation skipping transfer tax, if the deceased insured had any “incidents of ownership” in the life insurance policy. Since there is a possibility of estate taxes, it is important to consult with an estate planning attorney prior to selecting ownership of the policy and making beneficiary designations.

How to use life insurance in your estate planning.

Life insurance can be used in several ways in your estate plan. Life insurance is very helpful, since it provides additional or supplemental inheritance money to your heirs, besides a home or your savings money. Some of the estate planning uses of life insurance include:

  • Life insurance provides liquidity to pay administration expenses or debts, so your house or accounts would not have to be sold or split up to pay for estate costs.
  • Life insurance also provides liquidity to purchase assets from other trusts or probate estates. This can occur when there is real estate or business interests that the family wants to keep in the family.
  • Life insurance can provide a trust estate for people still in the accumulation phase of life, usually a minor or young adult. You can put the life insurance in a trust to be held in trust, rather then given in a lump sum.
  • Leveraging the value of the gift tax annual exclusion and exemption, and generation skipping transfer tax exemption, life insurance could potentially allow you to transfer larger amounts of wealth than you could with a straight, outright transfer.

Basically, life insurance is a helpful asset to include in your estate plan. If you already have life insurance, consult with an estate planning lawyer to see how to maximize the benefit of your life insurance in your estate plan. If you do not have  life insurance, consider discussing life insurance with an estate planning attorney and/or insurance agent to see what type of insurance policy integrates well with your estate plan. Contact the Skillern Law Firm office today and set up your free consultation.

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