Clean Up Your Beneficiary Mess

Clean Up Your Beneficiary Mess

In the past the word culture referred to a society’s accumulated knowledge and its time-tested and proven body of values and principles which each generation must pass on to the next if the ongoing continuity and success of the community was to be assured.  But much like paper currency, words lose their value over time.

Terms today like youth culture, bantered about endlessly, reflect a contemporary understanding of culture as nothing more than an inventory of current tastes, preferences and distractions, usually defined and pursued by those who aren’t paying the bills.

And if you think that values and principles are hard to pass down, try getting a death benefit to the next generation, especially if the next generation are still minors.

The Beneficiary Designation

The biggest opportunity for disaster on an insurance application comes when the advisor must complete the beneficiary designation.  The most important aspect of the transaction is assuring that the death benefit will go where it is intended, and the space provided to that end is totally inadequate for the purpose.  The “little beneficiary box” serves both to intimidate clients into thinking their directions must be short and sweet and to encourage lazy advisors not to take the time to put full and complete instructions on a separate sheet of paper – especially when children are involved.

There should never be a contingency that will result in an under-aged beneficiary.  Minors (the age of majority differs from state to state) are legally incompetent to accept death proceeds.  Guardians to handle their affairs must be appointed in legal proceedings that are time-consuming and expensive.

The best solution is to name as beneficiary a trust that will hold and use the funds for the minor children until the trustee is instructed to distribute them by the terms of the document.  The difficulty is convincing an insured to get a trust written even when the size of the death benefit makes a compelling argument for the trouble and expense.

The good news is that there is an uncomplicated solution.

All states have a Uniform Transfers to Minors Act (UTMA) on the books.  The law enables you to title property (or craft a beneficiary designation) in the name of a custodian for the benefit of a minor child.

The comparative disadvantages versus a trust are 1) the custodian must carry out duties to the child as spelled out in the law, which may not be exactly or as flexible as what the insured would prefer, and 2) distribution of the funds must occur at an age given in the law (21 in most states) which may be younger than the insured would like.

Not perfect, but as my Mother used to say, “A speckled axe is better than none.”  Call it a poor-person’s trust created for you by the state.

But the UTMA designations can be tricky.  State may differ in what they require (the word “uniform” notwithstanding) and carriers may differ in what wording they prefer.  A full and separate designation must be spelled out for each minor child and successor custodians should be named – and, yes, it will require a separate sheet of paper.  But CPS will help you draft the designation.  Then you can devote your time to seeing that the client passes on his or her culture to the minor children involved.

Call for help on any ownership or beneficiary designation, but especially one creating a custodianship under your state Uniform Transfers to Minors Act.  Try me at 706-354-0401 or tom@cpsadvancedmarkets.com.