So what happens if your spouse dies and your child is the beneficiary of the policy?
Since most policies do not permit a minor to receive the funds, you want to be sure that the proceeds are protected for the children.
Under the Uniform Transfers to Minor Act, a custodian, usually the surviving parent, can hold the funds for the benefit of the child. The account would be set up in your own name, followed by the words “as custodian for [child] under the Connecticut Uniform Transfers to Minors Act.” There is no document required; all rights, duties and authority are spelled out in the Act.
As the custodian, you have the discretion to spend the proceeds of the life insurance policy for the benefit of the child without regard for the duty or ability of the parent to provide for the child. Further, you are entitled to reimbursement from the account for acting as custodian. When your child turns 21 and is no longer a minor, the proceeds must be paid to the child.
Life Insurance Trust
A Life Insurance Trust provides the most protection and flexibility. The trust can be the owner and the beneficiary of the insurance policy. Specific language can be drafted. For example:
- The child can be named as an irrevocable beneficiary of the policy until he reaches the age of majority, or
- Remain in trust and allow for distributions at specific ages.
When support obligations end, the benefits could be directed to be paid to other beneficiaries. This could be especially important if the health of the insured may have changed over the years and a new policy could not be obtained.
You may name any adult as the trustee after your death, including your ex-spouse, another relative or a professional trustee such as an estate planning attorney or bank trust officer.
Although a Life Insurance Trust may be the smarter of the two options, it is complicated to set up, with many decisions to be made. If you are interested in discussing this option, call us, we’d be happy to assist you.