Naming your minor child as the beneficiary of your life insurance policy is a mistake. State law will prohibit your minor child from taking the money directly. A probate case must be opened to appoint a guardian to take possession of the funds and manage them for the benefit of your child. The probate proceedings will incur expenses that will be deducted from the funds and, if a corporate guardian is appointed, such as a bank, additional fees may be incurred for as long as the guardianship lasts. You can avoid such problems by setting up a trust for your minor child. (See Reference 1 [Life Insurance] and Reference 2 [section 10])
Choose someone you know and trust to be appointed trustee. Because the trustee is responsible to manage the life insurance funds until your child is an adult, you must carefully select the trustee to ensure he will carry out your wishes for your child's financial well-being.
Consult with an estate planning attorney regarding the preparation of a trust for your child. Inform the attorney of your intention to use life insurance proceeds to fund the trust, the name of the trustee and any other specific information regarding your intention for use of the proceeds, such as using it for your child's college education.
Review the trust document prepared by your attorney to ensure it represents your wishes. Sign and date the trust as indicated by your attorney.
Purchase a life insurance policy appropriate for the needs of the trust you set up. Be sure to identify as the beneficiary of the policy the trustee named in your trust. The appropriate designation will be similar to the following "John Smith, trustee of minor child's trust" with the specific information taken from the name of your trust and trustee's name.
Most states have enacted some version of the Uniform Transfers to Minors Act, also called the UTMA. If your only need for a trust is to handle life insurance proceeds in the event of your passing, you can avoid the formality of establishing a trust by using your state's UTMA laws. For example, under California Probate Code Section 3903, you can name as the beneficiary of your life insurance policy the same person you intended to name as trustee by including the following designation: “[the name of trusted person] as custodian for [the name of your child] under the California Uniform Transfers to Minors Act.” (See Reference 4 - section 3903)
Establishing a trust for your minor child is complex and should be done in consultation with an attorney who specializes in estate planning.