For most parents of young children, the primary asset that would be available should a death occur is life insurance. Often, when I meet with parents, I find that they have named their children as the direct beneficiaries of their life insurance policies. While the intent is to protect their children, most parents do not understand the potential consequences of this strategy.
In Wisconsin, state law determines that a child will be entitled to receive insurance proceeds at the age of 18. In the meantime, the insurance company will not release the proceeds until a guardian has been appointed by the court. The guardian will have limited discretion regarding how the funds can be used or distributed. Further, if a child’s biological parents are divorced or otherwise separated, the surviving biological parent will most likely be named as the child’s guardian and therefore the person who is authorized to manage the life insurance proceeds. This arrangement is often contrary to the deceased parent’s intent.
When minors are involved, a better strategy is to establish a trust within your will (known as a testamentary trust) or within a revocable living trust and to name this trust as the beneficiary of your life insurance policy. The advantage is that you can choose the trustee (who will be in charge of the proceeds), and you can also determine the terms under which the assets can be used and distributed from the trust. For example, you could name your current spouse, your parent, or your sibling as the trustee and authorize the trustee to distribute as much of the trust assets as he or she determines is appropriate for your children’s health, education, maintenance, or support until each child reaches the age of 25.
A qualified estate planning attorney can recommend the best strategy for your situation, especially pertaining to the establishment and use of a trust. To arrange a free consultation regarding your own estate planning needs, please contact our office at (608) 824-9540.