Here’s Why Experts Say Naming Your Kids as Beneficiaries on Your Accounts Is Risky
Written by
Laura Bogart
Edited by
Kristen Mae
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Nobody likes thinking of the inevitable — death, the end of the road, or the big sleep. Yet estate planning, especially having clear beneficiaries listed for every account, is a crucial part of any financial planning process. If you’re a parent, you’ll naturally want to use your plans to do what you’ve always done: look after your children. That might mean naming them as beneficiaries on your accounts.
But what if making your kids your account beneficiaries could cause more harm than good? It may be surprising, but there are instances when naming your children as beneficiaries can create financial and legal complications, leaving a headache as your legacy. GOBankingRates explored why naming your kids — especially when they’re still minors — might not be the best idea.
1. It Can Cause Issues with Your Kids’ Guardians
Caring for your children if you’re not there to raise them is a sacred responsibility, and you want to show the friends and family members who step up to that role how much you respect them. Making their lives complicated is the last thing you want to do. Yet naming your kids as account beneficiaries might do just that.
Your kids’ guardians would have to get permission from a judge to buy or sell assets, or even to use the money for your children’s needs. In addition to helping your children adjust to the pain of your loss, the guardian would face costly and tedious legal filings. If the judge denies any requests, the guardian might also be saddled with additional financial pressure.
2. The Distribution Might Not Meet Your Kids’ Needs
If there’s one thing you want above all, it’s for your funds to be distributed fairly among your children. You know your youngest has health issues requiring care, your middle child will likely go to grad school, and your oldest might not be ready to manage a large sum of money all at once.
Naming your kids as beneficiaries increases the risk that funds will be distributed equally and immediately — which could put some of your kids at a disadvantage. An article from the Village Law Firm explains: “Suppose one child is 16 and the other is 21 upon the death of the parents. In this scenario, the 21-year-old may have had his entire college education paid for, while the child who is 16 will have to use a large chunk of her inheritance to pay for her education. This can result in a discrepancy of hundreds of thousands of dollars.”
Simply listing your kids as beneficiaries could even create a circumstance where the uneven distribution leads to a disagreement or rift between your children — and that is not at all the kind of legacy you want to leave.
3. You Could Be Giving a Teenager Access to Big Money
Think back to yourself at 18 years old. Would you have trusted yourself with a large sum of money at that age? If you’re being honest, probably not. When you were 18, you might have prioritized flashy clothes or a new car over a high-yield savings account or retirement fund.
Naming your kids as beneficiaries could mean putting a significant amount of money into the hands of an 18-year-old — particularly a grieving one — or even someone younger. Instead of using their inheritance as a source of financial protection and a foundation for growth, they could spend irresponsibly or develop poor financial habits that might lead to debt later in life.
The Safer Alternative: Set Up a Trust
To protect your kids after you’re gone, consider leaving your assets in a trust. A trust makes life easier for your children’s guardians, ensures a more equitable distribution of funds, and safeguards your kids from the emotional and financial fallout of receiving a large inheritance at a young age.
Estate planning is about more than just naming beneficiaries — it’s about creating a thoughtful, long-term strategy that secures your children’s financial future. By working with a financial advisor or estate planning attorney, you can create a plan that supports your family’s unique needs, no matter what life brings.
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