Naming Your Children as Beneficiaries

December 30, 2015

children as beneficiariesYou may think it is relatively easy to name the people you want to be beneficiaries of your estate upon your death.  Naming your children as beneficiaries is a no-brainer, right?  But the method you use to transfer your assets to your children may differ depending on certain considerations: such as whether your children are minors or adults, or whether or not any of your children have special needs.  There may be concerns that the guardian appointed to care for your minor children may not have the expertise to manage a large inheritance on behalf of your children.  Further, special needs beneficiaries will need additional support throughout their lives, even as adults.  Here is a short summary of some of the common issues related to naming your children as beneficiaries of your estate.
Of course, the first consideration is appointing a guardian for your minor children.  The decision as to whom you should appoint as guardian for your minor children is a difficult one and should not be taken lightly.  If you are having difficulty choosing a guardian, we recommend you read some of our other blog posts and essays on guardianship of minor children.  If your guardian does not live locally, then parents should also consider a local short-term guardian to make sure the children don't spend a single moment in custody of the State or foster care.
Providing for your children financially
Once a permanent and short-term guardian have been appointed in the proper legal documents, the very next step should be making sure your children will be provided for financially.  In addition to leaving your assets to them, you should also consider life insurance which can replace the parental income that would have been available to support them until adulthood.  Retirement plans may be left to your children directly, but doing so may cause some unintended problems (discussed further, below).  The manner in which you leave your assets to your children will depend upon your goals and concerns.  Trusts are a very beneficial way to pass on assets to minor children because they allow more control of those assets, even after your death, for children (and guardians) who are not mature enough to handle their own finances.
Planning for your child’s education
Establishing a 529 plan for your child’s education is a great way to be prepared.  A 529 plan is a specific type of education savings plan, operated by a state or educational institution, for the purpose of helping families set aside funds for college.  It is called a 529 plan because of Section 529 of the Internal Revenue Code, which created this specific savings plan in 1996. A 529 plan allows you to maintain general control over the account until the money is withdrawn to pay your child’s education expenses.  The only thing you need to do, for estate planning purposes, is designate who will take over management of this account after your death.
How can a child inherit from your retirement plan?
A spouse can automatically receive the benefit of your retirement plan after your death, whether a 401(k), 403(b), IRA, TSP, or other qualified plan.  The retirement plan benefits received by your spouse maintain the same protections from creditors and bankruptcy.  However, your children do not have the option of rolling over the assets in your retirement plan into their own IRA.  Non-spouse beneficiaries generally must begin receiving the minimum required distributions soon after your death from an Inherited IRA.  These distributions are based on their age and are taxable income to your beneficiaries as those funds are distributed.  The entire balance of those funds are available to be distributed (and taxed) immediately, which eliminates any financial benefit from stretching out distributions and could mean that your children waste all of their inheritance by spending it.  In 2014 the Supreme Court of the United States decided Clark v. Rameker, which held that inherited IRAs for non-spouse beneficiaries are not protected from creditors the way that they are protected for spouses.  Careful considerations need to be made when deciding how to leave retirement plan benefits to your children, and a Retirement Plan Trust is a very beneficial way to protect those assets.
Children from a previous marriage
For some blended families, a decision has to be made as to who needs financial security more.  If you have children from a previous marriage, it is wise to weigh your desire to provide income and financial security for your current spouse, with your desire to provide an inheritance to your children.  There are many options to accomplish these goals; one way to accomplish both is to create a QTIP trust or bypass trust.  This tool gives you the option of providing for a surviving spouse, while the remainder goes to your children, including those from a previous marriage.
If you have questions regarding guardianship, beneficiaries, or any other estate planning needs, please contact Anderson, Dorn & Rader, Ltd., either online or by calling us at (775) 823-9455.

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