In my previous blog I wrote about the problems that can occur for children and spouses of parents who die without a valid Will. Another issue that parents must address to protect their families in the event of such a tragedy is proper planning for their children who may be beneficiaries of life insurance policies, IRAs, 401(k)s, Certificates of Deposit, and other similar financial accounts.
Life insurance policies and many of the other types of accounts allow the policy or account owner(s) to designate primary and secondary beneficiaries to receive the funds in the event that the owner dies. Any funds traveling from such a policy or account do not pass through the owner's estate – and thus are not normally subject to attachment by creditors of the owner – but rather they are delivered directly to the beneficiary(s).
The intuitive decision for many individuals with young children is to designate their spouse as the primary beneficiary, and to name their child or children as secondary beneficiaries; however, this is an ill-advised strategy. For the reasons illustrated below, a nightmare scenario can occur if minor children become entitled to receive funds as beneficiaries of a life insurance policy or other account.
Georgia statute O.C.G.A. § 29-3-1, et. seq. requires that if a minor child inherits or otherwise receives any property – including cash money – in excess of $15,000.00 in value, the property must be delivered to an independent legal conservator who acts subject to the authority of the Probate Court. This is true even when one or both parents of the minor beneficiary are still alive, as could be the case for a child inheriting property from a grandparent or other friend or relative.
During the term of any such conservatorship, the Court will be the final authority on how conservatorship funds are managed. The procedures and hearings involved in appointing a conservator are time consuming and expensive, and they can substantially deplete the value of the property at issue. In addition, a court-appointed conservator charges fees and is often required to buy an insurance policy to guard against fraud – all costs that are charged to the money being held for the minor.
Perhaps the biggest problem of all is that by operation of law, when the child reaches eighteen (18) years of age the funds in a conservatorship will be delivered to the outright control of the child. Anyone who has ever spent any time with the average eighteen (18) year old knows that this is a "magic act" in the making, as a teenager has the supernatural ability to make money disappear in the blink of an eye.
To avoid these problems and bypass the risk that a conservatorship could be established for your child, you should establish a living trust that is separate from your Will to function as a beneficiary of life insurance policies, retirement accounts, and other financial accounts for the benefit of your child. A living trust empowers you to nominate a trustee to receive and control any funds intended for your child's benefit, and to hold and protect those funds while your child is too young to do so for him or herself.
Depending upon the terms and provisions that you incorporate into your trust, the trustee can have the discretion to spend the trust funds for the child's education, health, and welfare, and under Georgia law the trustee will always have a fiduciary obligation to act in the best interest of the child.
By establishing a trust, you can also select the age at which the child can acquire outright control of the trust funds. It does not have to be eighteen (18) years of age, but rather you are permitted to require that the funds remain in the trustee's control until the child reaches an older age as selected by you. The oldest age of distribution that I have personally been directed to draft into a trust was sixty-two (62) – which seemed a bit extreme – but it illustrates the point.
It is crucial that the trust for insurance policies, retirement accounts, and other financial account funds be separate from your testamentary trust and estate. You never want to make your estate the beneficiary of funds that would otherwise travel outside of your estate, e.g., life insurance, because that creates the risk that those funds would become subject to attachment by creditors of your estate. By establishing a separate trust and making its trustee the beneficiary of such policies and accounts you can protect the funds from creditors, avoid the mandatory conservatorship issues addressed above, and establish a plan of distribution that works for the best interest of your child.
Although death may be a depressing topic for many, the issues addressed in this blog are important for those parents with young children, and unfortunately, it has been my experience over the years that people have been misinformed about this area of the law.David L. Walker, Jr., is a partner in the law firm of Flint, Connolly & Walker, LLP in Canton, Georgia, where he represents businesses and individuals in various legal matters.