The Perils of Leaving Your Kids' Assets to a Non-Trustee

Dan Mckenzie • Sep 14, 2023

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.


What next?

If you think it might be time to think through your estate plan, you can:


  1. Give us a call at 720-821-7604 to schedule an evaluation session with an attorney at which we can determine whether our firm would be a good fit for your needs. Or fill out our contact form to have us call you.
  2. Visit our estate planning page to learn how proactively thinking through your estate plan can protect you and your family, minimize hassle, lower the chance of family discord, and minimize or eliminate taxes.
  3. Learn more by reading our blog or watching our videos.

The Probate Process in Colorado

30 Apr, 2024
The Probate Process in Colorado

When and How Often Should You Update Your Estate Plan?

By Dan McKenzie • 04 Apr, 2024
The most common questions we get about estate planning are when to start it and how often to update it. Learn more about how we advise our clients on these questions here.

The Importance of Estate Planning: Avoiding Probate and Protecting Your Assets

By Dan McKenzie • 29 Mar, 2024
Proper estate planning is not just about saying who gets what when you die. Done correctly, it can help you avoid court and maintain privacy.

Understanding Probate in Colorado: The Guide to Timelines, Steps, and What to Expect

By Dan McKenzie • 28 Feb, 2024
If you have recently lost a loved one, you might find yourself participating in a probate process, either as the executor or a beneficiary. Learn more about what to expect from that process here.

Sharing Your Estate Plan: A Delicate Balance

By Dan McKenzie • 04 Feb, 2024
One of the most common questions we receive is whether or not to share the details of an estate plan with adult children. This decision is personal and can have far-reaching implications for the individual and their family. The Benefits of Sharing Your Estate Plan Sharing your estate plan with your adult children can be beneficial. Doing so allows the family to discuss the plan's details, including what needs to be done in the event of incapacity or death. This open communication can help set expectations and facilitate a smooth estate administration process. A discrepancy between the plan and what the family expected is one of the most significant sources of tension and difficulty during the estate administration. It can be helpful to identify and resolve the discrepancy while the person who can change the plan can either still do so or explain why they designed the plan the way they did. Our firm generally recommends communication with fiduciaries and beneficiaries about the plan. However, communication does not necessarily mean sharing the complete draft of the estate plan. The Risks of Sharing Your Estate Plan While there are benefits to sharing your estate plan, there are also potential drawbacks. One of the main concerns is that sharing the estate plan can create difficulties if the plan is changed after it has been shared. This can be particularly problematic if any of the beneficiaries of a previous plan will receive less from the new plan. Another risk is the possibility of inconsistent plan drafts circulating after death. This can lead to confusion and potential disputes among beneficiaries. Suggestions for Communicating Your Estate Plan Given these considerations, here are some suggestions on how to best communicate the details of your estate plan: Maintain a Record : Record what has been shared, who it has been shared with, and when it was shared. This can help ensure everyone is on the same page and minimize potential misunderstandings. Share Digital Copies : Consider sharing digital copies of your estate plan, accompanied by a cover letter or mark reminding everyone that the plan can change. This can help mitigate the risk of outdated drafts circulating. Provide a Summary : Instead of sharing the entire plan, consider providing a summary. This can give your family a general idea of your intentions without divulging all the specifics. Again, include a disclaimer that the plan can change. Remember, every situation is unique, and what works for one family may not work for another. It’s essential to weigh the benefits and risks before sharing your estate plan. As always, we’re here to help guide you through this process. Please note that this blog post is intended for informational purposes only and does not constitute legal advice. Always consult a qualified estate planning attorney for advice on your situation.

Contesting a Will in Colorado: A Simple Guide

By Dan McKenzie • 29 Dec, 2023
If you are unhappy with the terms of a will, you may have the right to challenge it in court. However, contesting a will is not easy and requires certain legal grounds and procedures. This blog post explains the basics of how to contest a will in Colorado, including who can do it, what reasons are valid, and what steps are involved.

What to Do If You Think Your Trustee Is Not Doing Their Job Right

By Dan McKenzie • 26 Dec, 2023
Explore the essential steps to take when a trustee is not fulfilling their duties effectively. This guide provides practical advice on identifying trustee shortcomings and the legal actions available to address them. Ensure your trust is managed properly with our expert insights on trustee responsibilities.

What is the Formal Probate Process in Colorado and When Do You Need It?

By Dan McKenzie • 24 Dec, 2023
The blog post outlines the formal probate process in Colorado, detailing when it's necessary and the steps involved. It serves as a guide for individuals navigating the legalities of estate management after a loved one's passing. The content is informative and designed to assist users in understanding the complexities of probate law in Colorado.

How to Start an Informal Probate Process in Colorado

By Dan McKenzie • 24 Dec, 2023
Discover the straightforward steps to initiate an informal probate process in Colorado with our concise guide. Learn what information is required for the application, including personal details of the decedent and your connection to the estate. Understand the importance of meeting the time limits for filing and find out how to navigate the process without a court hearing, all explained in simple terms. Ensure a smooth probate journey with our expert insights on Section 15-12-301 of the Colorado Probate Code.

What To Do With the Will of Someone Who Has Passed Away in Colorado

By Dan McKenzie • 21 Dec, 2023
What happens to the Will of someone who has passed away in Colorado? Learn about the custodian’s duty to deliver a will promptly and to the correct probate court, ensuring your loved one’s wishes are honored. Discover the importance of acting swiftly and accurately in the probate process to preserve legacies and avoid legal repercussions.
More Posts
Share by: