As parents, we always want what's best for our children. That's why we work hard to provide them with a great life, a good education, and a solid future. However, sometimes unknowingly we may make some mistakes along the way. For example a common error in financial and estate planning, is naming your dependent children as beneficiaries of your life insurance, annuities, or other financial contracts. This may not be the best decision. Here's why.
To start, your dependent children are minors and cannot legally manage money until they reach the age of majority, which is usually 18 years old. This means that if you pass away and your children inherit your assets directly, the court will appoint a guardian to manage the money on their behalf. This process can be lengthy, expensive, and emotionally draining for your children, as well as for the guardian.
Next to consider is, even if your children have reached the age of majority, they may not have the necessary financial skills and maturity to manage a large sum of money. Without proper guidance, they may overspend, invest poorly, or fall victim to scams and frauds and the money may not last even to their age 21. Moreover, if your children are still in school or college, they may not be able to balance their studies and their finances effectively.
A final thought is, if you name your dependent children as beneficiaries of your life insurance, annuities, or other financial contracts, their inheritance may be subject to creditors, lawsuits, and divorce settlements. This means that their inheritance may not be as secure as you had hoped, and money could end up in unintended hands. As mentioned before, leaving assets to you dependent loved ones incorrectly leaves the risk of those assets being depleted or lost entirely.
So, what should you do instead?
The answer is to use estate planning tools that can transfer your assets to your dependent children in a better way. For example, you can create a trust that holds your assets and designates a trustee to manage them on your children's behalf. You can also set up a custodial account that allows you to name a custodian to manage the money until your children reach the age of majority. These options allow you to provide for your children while ensuring that their inheritance is protected and managed wisely.
Let me relay a story about Carla to put this into context:
Carla was a single mother of two young children. She had a life insurance policy with a significant payout and named her children as beneficiaries, thinking she was doing the right thing to provide for their future. However, when Carla tragically passed away, her children were still minors and unable to receive the funds. The court appointed a guardian to manage the funds, and they were used in ways that did not align with Carla's goals and values for her children.
If Carla had worked with a financial planner and an estate planning attorney to establish a trust, she could have named a trusted family member as the trustee, ensuring that the funds were managed in a way that aligned with her wishes.
It's important to work with a financial planner and an estate planning attorney to determine the best approach for your unique situation. The right professionals can help you create a comprehensive financial and estate plan that takes into account your goals, values, and financial circumstances.
At AIPS, we are committed to helping you protect your financial future. Contact us today to learn more about our estate planning services and how we can help you provide for your dependent children.
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