Dear Penny: Can My Daughter Inherit Life Insurance if She’s Still a Minor?

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Dear Penny,

I’m a single mother, and I’m trying to best plan how to protect my daughter if I were to pass. I have a life insurance policy, but it’s only $10,000. Her 529 plan is only 2 years old, and I have my own small savings as I’m starting my career.

If anything were to happen, I want to make sure that only she has access to any money. I have to make sure that she’s safe. How can I ensure she will receive it all, and with no “oversight” or guardian in charge of it?

-Single Mother

Dear Single,

A minor generally can’t take control of property until they reach the age of majority. That’s 18 in most states. But oversight isn’t a bad thing.

In fact, the person who’s responsible for managing the money — be it a property guardian, an account custodian or a trustee — would have a fiduciary duty. That means they’d be legally obligated to put your daughter’s interests ahead of their own. Their role is to keep that money safe and make sure it’s used for your daughter’s benefit.

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Think carefully about the people you know whom you’d trust to manage money for your child. It doesn’t necessarily need to be the same person you’d want to serve as her legal guardian.

But the rule of thumb is that if you don’t have an estate plan, your state probate court has one for you. In other words, the probate court would appoint someone to make financial decisions on your daughter’s behalf. That may not be the person you would have chosen. Moreover, the process of appointing a guardian requires time in court, and court costs would be paid from your estate. That would ultimately mean less money for your daughter.

If you haven’t done so already, you need to make a will. Ideally, you’d create your will with an estate attorney, particularly since you have a minor child. But if you can’t afford the cost, many online services allow you to draft basic estate documents for $100 or less.

The easy part is the money in your daughter’s 529 plan. You can designate a successor account holder to manage the money until your daughter is an adult.. It’s as simple as filling out a form through your brokerage.

Before I go any further, I want to discuss the amount of life insurance you have. That’s because with just $10,000 of coverage, I doubt there would be much left for your daughter after your final expenses are paid. Upping your coverage needs to be a top priority.

Aim for at least 10 times your annual salary, which may be more affordable than you think. A female nonsmoker born in 1985 with no major health conditions can obtain a $1 million, 20-year term life policy for around $65 a month or less, according to the insurance website Policygenius.com. This should be an even higher priority than funding your daughter’s 529 plan.

Once you’ve obtained proper coverage, you could use a law called the Uniform Transfer to Minors Act (UTMA) to leave your life insurance money and other assets to your daughter and designate someone you trust as the financial custodian in your will. They’d be responsible for managing the money for your daughter until the age of termination — 18 or 21 in most states — at which point your daughter is 100% in control of the money.

Though oversight is something you say you want to avoid at this point, I’d urge you to think very carefully about that one. Many young adults lack the maturity and financial savvy to manage a large amount of money. So many parents and grandparents want to put oversight in place as part of their estate plan.

Should you change your mind on that, a living trust is the best way to go. You’d appoint someone as trustee to manage trust assets according to the wishes you’ve spelled out in trust documents. For example, you may not want your daughter to receive a lump sum as soon as she turns 18 or 21, so you could use a living trust to provide for annual distributions instead.

A properly structured trust will avoid probate, which means the money will get to your daughter faster. Because your estate will save on court costs, that also means more money for your daughter.

Drafting a will is a lot simpler than creating a trust. Though online templates exist for establishing a trust, I’d recommend hiring an attorney to help you navigate the complexities.

If you need to DIY your estate plan for now, that’s fine. You’ll be putting safeguards in place for your daughter and conveying your wishes to the court. You can hire an attorney later to revise these documents and make sure they’re as airtight as possible. In estate planning, something will almost always be better than nothing.

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Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected].