Intent #3: If the money (or some of it) is not needed to raise the children, let it be held for them in the most cost effective and prudent way possible, and/or let it be given to them as an inheritance for their adult life in as responsible a way as is feasible.

Note: Many of the risks inherent in Beneficiary Designations (A) through (F) were explained in the Intent #1 Section and won't be repeated in this section; however, they do apply to this section as well.

Beneficiary Designation (A): A trust is an excellent way to accomplish Intent #3. Once the children have grown, the money that was all together in one pot for them can be split up so that each child gets their share. The beauty of this method is that you can stipulate in your trust at what age and under what conditions your children could have access to any remaining money. For example, you can state that if they dye their hair green and join a cult, they won't get any money. Or if you already have green hair and have joined a cult, you can state that if your children leave the cult, they won't get anything. (Cult members, please note that life insurance policies do not cover suicide in the first two years.) The point is, that through your trust you can have some control over the money even when your children reach adulthood. It can even be set up so they get the money in increments, instead of all at once; which can give them a chance to learn how to handle money before it all gets blown at once. Your trust can also protect the money from your child's creditors and from their spouse getting the money if they get divorced.

Beneficiary Designation (B): For Intent #3, simply naming a trustworthy adult as the beneficiary has a lot of problems. As explained in the Intent #1 Section, this person really needs to make sure that if they die the money doesn't go to other heirs instead of your children. They must be honest and stay honest. They will face gift taxes in trying to get the money to your children, so they will have to be knowledgeable and willing to set up a method of gifting the money to the children that avoids gift taxes; especially if there is a large amount of money left.

They will have to be very competent, etc., or the children won't get much of an inheritance, if any.

Since the money doesn't legally belong to the children, the trustworthy adult doesn't have to turn the money over to them at age 18. It would be possible to start gifting them small amounts and increase those amounts later as they get older and more experienced.

Beneficiary Designation (C): For Intent #3, naming the minor children, but designating an informal trustee (to handle the share of any child who is still a minor at your death) by using a special form that some life insurance companies provide, can partially work if it survives the inherent risks. But each child's share would have to be completely turned over to him or her at age 18 (may be age 21 in some states).

There is one way around that. A little before your child reaches the magic age to have the money turned over to them, the informal trustee could turn the money back over to the life insurance company to put into an immediate annuity that would pay your child a certain amount a month, for a certain amount of years; at least that way, it won't all go at once.

Beneficiary Designation (D): See (C) or (F). It depends on the specific insurance company as to whether they would handle it like (C), or like (F).

Beneficiary Designation (E): For Intent #3, naming the minor children with the provision that if any are still a minor when the proceeds are to be paid out, then that child's share is to be paid out to a trustworthy adult who is designated as a custodian of the child's share under the Uniform Transfers to Minors Act of their state, can work somewhat, if it survives the inherent risks. If you would like even more safety you could require the custodian to be bonded. There would be good safety because the surety bond company would be insuring your child's money against loss. It does come at a price though. For example, if each child's share was $50,000, then each bond would cost about $260 annually. Or if each child's share was $250,000, then each bond would cost about $1,000 annually.

The surety bond company would demand that the custodian personally have good credit, and that he keep good records. They may want him to pay in advance for all the years of bond premiums that will be estimated as necessary. Obviously the person you name as custodian would have to stand up to close scrutiny.

He may have to pay those bond premiums out of his own pocket, but in turn he can charge for his services as a custodian if he so chooses. The money he charges would come out of your child's money. Even if he's not required to be bonded he can still charge for his services. Whether bonded or not, if he does charge for his services he will be held more personally liable for how he manages your child's money.

At any rate safety costs extra but is very worth considering. If you do decide to require the custodian to be bonded, you may want to include some extra coverage in your life insurance policy to account for the cost of the bond. The beneficiary for this portion would be the custodian as himself, not as custodian (as in the Beneficiary Designation (B) type of beneficiary).

Under the UTMA, some states allow for the postponing of the money being turned over to the child, if you so designate. In California, the turning over of the money can be postponed as long as until the child reaches age 25 (if you so designate), which is a significant improvement over age 18. Remember that even in postponing, the custodian can still give the child money as needed. Once the time does come to turn the money over to your child, it would be the complete remaining amount of his share, all at once. That is, unless as just explained in this Intent #3 Section under Beneficiary Designation (C), the custodian sets it up with the insurance company to pay your child his inheritance a certain amount per month for a certain amount of years.

Beneficiary Designation (F): For Intent #3, simply naming your minor children as beneficiaries works well as far as keeping the money safe until they become an adult, due to the probable court supervision. Except that all the fees involved may eat into the proceeds, if each child's share is not of a significant enough size. See the explanation just preceding the Intent #1 Section. And when a child reaches age 18, any money remaining in his share would be completely turned over to him.

Licensed in:
Arizona, California (license #0629626), Oregon, Texas, and Virginia. For other states, inquiries are referred to agents licensed to handle insurance in that particular state.

PGA Financial has no intent to generate interest in any particular life insurance company or specific policy, but rather to inform and educate you on the general concept -- after which, if you are interested, a broker at PGA Financial will be glad to research companies that offer such plans, get you a quote and assist you in making a choice. If you do become interested and obtain a policy, the broker would be compensated by the insurance company.

© 1998 The PGA Financial Co. All rights reserved.