One question many Minneapolis residents have is whether they need an estate plan if all of their assets are primarily cash accounts like insurance policies, retirement accounts like IRAs, or bank accounts. These accounts enable owners to add a pay on death beneficiary designation, which is a straightforward way to ensure the asset passes directly to the heir without the need for probate. However, while naming your minor child as a beneficiary may seem like a straightforward choice, it can bring unexpected complications. This article examines why it’s important to consider alternative approaches to naming minors as pay on death beneficiaries.
Can I Name My Child as a Beneficiary on Cash Accounts?
While it’s tempting to list your child as a beneficiary on accounts such as life insurance, bank accounts, or IRAs, this decision can be fraught with issues. Minors are legally unable to manage large sums of money, and cash payouts to minors often require court-appointed custodians. If you’ve listed your child as a beneficiary, the court could delay disbursing funds until the proper guardianship or custodianship is established. Read why you also shouldn’t name your estate as your IRA beneficiary.
What Happens If My Child Is Named as a Beneficiary?
If a minor is listed as the beneficiary of your life insurance policy, retirement accounts, or even a bank account, they cannot directly receive the funds. The Minnesota probate court may need to appoint a custodian to oversee the account, which can take months. During this time, the child could be without access to crucial financial support. Even after a guardian is appointed, they may need court approval for every expense, which can severely restrict the use of the funds. Read more in our article, What Age Should My Kids Be When They Receive Their Inheritance?
Are There Limits to the Number of Beneficiaries I Can Name?
Yes, there are practical limitations to consider when naming multiple beneficiaries. In many cases, trying to divide an estate between numerous beneficiaries, such as nieces and nephews, can complicate the process. Listing more than three or four adults is usually manageable, but once you get into five or more, especially with retirement accounts like IRAs, the tax treatment can differ significantly, adding unnecessary complexity.
How Are IRA Beneficiaries Taxed?
Naming beneficiaries for IRAs or 401(k) accounts is more complex than listing someone for a bank account. Depending on the beneficiary’s relationship to you, the taxation on these accounts can vary. For instance, if an adult child is named, they may have to withdraw the funds within a certain period, potentially incurring high taxes. On the other hand, listing a minor as a beneficiary can lead to custodial accounts, where tax rules still apply but with different considerations.
Why Should I Consider a Trust Instead?
When you have multiple beneficiaries or minor children, a trust is often the best solution. A revocable trust allows you to name the trust as the beneficiary on all cash accounts, from life insurance policies to bank accounts. This way, you’re not naming dozens of individuals or risking complications with minors. The trust can then distribute funds as you see fit, whether in lump sums, over time, or under specific conditions. Trusts also help avoid probate, making the transition smoother and more private. Learn more in our articles, What You Need to Know About Testamentary Trusts: Are They Right for Your Estate Plan?and Transfer On Death Deed: Watch Out
What Happens to Bank Accounts with Multiple Beneficiaries?
For bank accounts or investment accounts, many financial institutions limit the number of beneficiaries you can name, and listing minors complicates the process. Like life insurance and retirement accounts, banks also require custodians if a minor is involved, which delays access to the funds. For simplicity and efficiency, naming a trust allows for easier management of the accounts upon your passing.
What Should I Do If I Want to Leave Money to Multiple People?
When you have several beneficiaries, it may be better to name a trust as the beneficiary of your life insurance, IRAs, or other accounts. Creating a revocable trust with a qualified Minneapolis estate planning attorney will allow you to manage distributions in a more controlled manner, ensuring that minor beneficiaries are protected, and adults receive their fair share without complications. Through the trust, you can also name charities or set up ongoing trusts for minors, safeguarding their financial future.
Read More: Can’t I Just Name A Child On My Bank Account?
What Is the Best Approach to Avoid These Risks?
If you want to avoid the complications of naming your child or multiple beneficiaries directly, consider setting up a revocable living trust. By naming a trust as the beneficiary of your life insurance, IRA, or bank accounts, you can specify how the money will be managed and distributed. This ensures that minor children are cared for without court delays and that multiple beneficiaries receive the funds without unnecessary tax burdens.
Speak with a Minneapolis Estate Planning Attorney to Control How Your Cash Accounts are Distributed
Naming your child or multiple individuals as pay on death beneficiaries may seem like a simple solution, but it often leads to legal and financial complications. By considering alternatives like revocable trusts, you can provide for your family’s future without delays or burdensome court involvement. Planning ahead ensures that your loved ones are financially secure in the way you intend.
Schedule a call with the Stone Arch Law Office estate planning team in Minneapolis to learn how we can help you craft a plan that protects your minor children or multiple beneficiaries and distributes your assets in the way you want.
