Sunday, January 27, 2013

What can I do if I can't leave my spouse in charge of the kids' inheritance?

What can you do when you're worried that your spouse won't be able to properly look after assets you want to leave to your children? Recently a reader asked me that very question, and I'm sharing the answer here. Here's the question:

"I can not trust my husband with money as he always ends up losing everything in stocks. so is it possible to appoint my 2 minor children as beneficiaries to my life insurance plans, property and other assets? if so, then how do i insure my husband does not get access to the money while my kids schooling and daily expenses are financed through their inheritance?"

Yes, it's possible to name minor children as beneficiaries of insurance policies, but before you do that, there are other options to consider.

If you name a minor on an insurance policy, the child will receive his or her share of the policy on his/her 18th (or 19th, depending on where you live) birthday. The children have no access to any of the money before that. And once they receive it, there are no controls on it. Many parents feel that this is not a good way to deliver funds to the children, as the kids won't have any guidance, help or protection in dealing with the money.

Let's look at what happens when you name your estate as the beneficiary of the life insurance policy. If you do this, it is absolutely critical that your will be set up properly to bring about the outcome that you want. This is too important for you to do a home-made will, so you would need to see a lawyer to ensure that your will is solid.

If you name your estate as beneficiary, and then use your will to leave the funds to your children, your first concern appears to be ensuring that your husband is not in control of the money. The person you name as executor is the one who is in control of the money in the estate, unless you say otherwise. You would have a couple of options here. One is to name someone other than your husband as the executor. The other is to allow him to be the executor but to specifically name someone else to handle the trusts for the children, if you are comfortable with him having even that much control. You could name a sibling, a trusted friend, or a trust company.

If you pass away while your children are minors, your insurance proceeds would flow into the trusts you've set up in your will. If the will is properly drafted, the trustee of the children's funds would be able to pay for things for the children before the age of majority, for example, a school trip when the child is 16, or hockey equipment at age 14.  You would make the decisions about how money can be used at the time you make your will because that's when the trust is written into your will. The wording is very important.

Using your will, you can also decide that your children might not get the full insurance proceeds at the age of majority. Depending on the amount of the proceeds, you might think it a good idea to give them some of the money at 18, and the rest at 21, for example. These is another decision that you make at the time  your will is set up.

Some wills contain specific instructions that the surviving parent is not to be put in control of the money.

There is another side to your question. As I answer this, keep in mind that as far as I know from your question, this is not a second marriage situation. You appear to be asking whether you can leave everything you own to your children. This is probably not a good idea. Simply stated, you can't simply leave your spouse entirely out of your will.

Your spouse is entitled to a share of your estate, simply by being your spouse. If you leave your spouse out entirely, you run a very strong risk that your spouse will make a claim against your estate to be given some or all of the estate. And his chances of winning are pretty good. It's a better idea to figure out a way to benefit both him and the children.

One option is a spousal trust, which would mean putting your assets into a trust for your husband's whole lifetime. He could then use the assets (for example he could live in the house) but he couldn't sell them or mortgage them. Now, there are plenty of downsides to this plan. For one, nothing that is jointly owned can be put into the spousal trust because your husband will already own them by right of survivorship. Second, your children wouldn't get anything until your husband passes away.

Another option is finding a way to divide the estate between them. For example, if your husband receives the home, personal belongings and bank assets by right of survivorship, your children could receive the life insurance policy. And then you'll have to trust him to leave the kids whatever he owns in his own will when the time comes.

You have options, but every decision has pros and cons. I'm really glad that you're doing your research and finding out how to protect your kids. Why not take this information that I've given you and talk it over with a lawyer in your area?

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