If you have minor children, you may think that naming an adult friend or family member as the beneficiary of your life insurance and retirement accounts is an excellent way to provide for your children after your death. You may expect that the friend or family member will use the money for the benefit of your kids and give it to them when they reach a certain age. However, this arrangement has many drawbacks and risks you may not be aware of.

A better option is to designate a trust as the beneficiary of your assets and name the friend or family member as the trustee. Here are some reasons why:

• Without a trust, there is no clear guidance on when or if the friend or family member is supposed to give the money to the child. The friend or family member may have different ideas than you about how much money the child needs or what it should be used for. The child may also have no way of knowing how much money was left for them or how to access it.
  
  
• Without a trust, the money is legally the friend's or family member's, and it is on their conscience to give to the child. The friend or family member may be tempted to use the money for their purposes or may be influenced by other people to do so. Even with good intentions, they may face pressure from their spouse, creditors, or other relatives to share or spend the money.
  
  
• Without a trust, even if the friend or family member is morally pure and fully intends to give the child all the money, they can inadvertently lose the funds to a divorce, an unexpected medical bill, a lawsuit, or any other financial hardship. The money is not protected from the friend or family member's creditors or legal claims and may be seized or garnished at any time.
  
  
• Without a trust, giving the money to the friend or family member will confuse who is responsible for taxes on income earned by the assets. It may also result in gift tax returns having to be filed when the friend or family member gives money to the kid. Those gift tax returns will complicate the friend or family member's estate planning and may reduce their lifetime gift tax exemption.
  
  
• Without a trust, while the money is under the friend or family member's control, it is part of their estate. If that person dies with money meant to go to your kids, it would instead go to the beneficiaries of the friend or family member’s estate. This may not be what you or your kids want and may cause conflicts among your relatives.

In contrast to all this, a trust allows you to put the money for your kids under that adult's control but makes it clear to that adult, your kids, and everyone else that the money is for the benefit of the kids and can't be misspent or lost by the adult. A trust lets you specify how much money the child should receive and when. A trust protects the money from creditors, lawsuits, divorces, and other risks. A trust also simplifies tax reporting and estate planning for you and your friend or family.

As you can see, naming a trust as the beneficiary of your life insurance and retirement accounts is a much safer and smarter way to provide for your minor children than naming an adult friend or family member. If you want to learn more about how to set up a trust for this purpose, contact me today. The McKenzie Law Firm specializes in estate planning, and we can help you create a trust that meets your needs and goals.