Some factors for parents and grandparents to consider.
Naming a minor as a beneficiary brings up a major concern. If parents or grandparents make a child a primary or contingent beneficiary of an insurance policy, IRA or investment account, they should be aware that most policies and investments will not directly transfer to a minor. They need to be received by a court-approved property guardian, a trustee of a children’s trust, or a revocable living trust beforehand.
State laws prevent children from receiving large lump sums. They commonly prohibit minors from owning real property worth more than $2,500-5,000 (the limit varies per state) or receiving cash inheritances greater than that. It is incredibly rare for insurers to distribute life insurance proceeds to minors.
As for POD checking and savings accounts and CDs, banks will usually allow the child or the child’s parent(s) to receive sums less than the aforementioned limits. For larger sums, the parent(s) will likely have to turn to a court and ask to be appointed guardians for the money if no property guardian, children’s trust or revocable living trust is in place.
A personal guardian is not always a child’s property guardian. Usually, one person serves as both – but if that person lacks financial literacy or accountability, another property guardian may need to be appointed to manage assets for the child until the child turns 18. If that is desired, a court must review the choice of guardian and the inherited assets will be probated.
How may circumstances like these be avoided? Parents or grandparents would be wise to consider three options.
A property guardian can be appointed for a child in a will. If an individual who may become the child’s personal guardian is negligent or incompetent at managing wealth, this may be worthwhile. The property guardian will need court approval to sell any of the inherited assets, and rules will govern how the assets are spent.