As parents, we want nothing more than to provide for our children and ensure their financial security—especially if something happens to us. It seems logical: add your child’s name as a beneficiary on your life insurance policy, retirement account, or bank account, and you’re done. They’ll be taken care of, right?
Unfortunately, this well-intentioned decision can create serious problems that leave your children vulnerable, tie up your assets in court, and leave your family facing unnecessary expenses and delays during an already difficult time.
At Fratello Law, we’ve helped countless Long Island families navigate these complex estate planning challenges. Our “Small Firm, Big Heart” approach means we take the time to explain not just what you should do, but why it matters for your family’s future. Today, we’re going to explore why naming minor children as direct beneficiaries is problematic—and what you should do instead.
The Problem with Naming Minors as Direct Beneficiaries
Under New York law, minors (anyone under age 18) cannot legally own substantial assets or make financial decisions. While this seems like a simple legal technicality, it creates real-world complications that can significantly impact your family.
Financial Institutions Won’t Release Funds to Minors
Here’s what many parents don’t realize: even if you name your minor child as the beneficiary on your life insurance policy or retirement account, the insurance company or financial institution will not release those funds directly to your child.
Why? Because minors cannot legally enter into contracts, sign releases, or manage financial accounts. The institutions have no legal authority to give money to someone who cannot legally receive it.
So what happens instead? The funds must go through a court-supervised process, creating the very complications you were trying to avoid.
Court-Appointed Guardianship Becomes Necessary
When a minor child is entitled to receive assets, Nassau County Surrogate’s Court or Suffolk County Surrogate’s Court will typically require the appointment of a guardian to manage the money on the child’s behalf—even if there’s a surviving parent.
This creates several problems:
Court Proceedings and Delays: The guardianship process requires filing petitions, attending court hearings, and obtaining court approval before any funds can be accessed. This can take months, during which time your family cannot access the money you intended for them to use immediately.
Significant Costs: Court proceedings aren’t free. Your estate will need to pay:
- Filing fees for the guardianship petition
- Attorney fees for representation
- Bond premiums if the court requires the guardian to be bonded
- Ongoing accounting fees for annual reports to the court
These costs can easily total thousands of dollars—money that should be spent supporting your children.
Loss of Control Over Who Manages the Money: You might assume that if you pass away, your spouse or a trusted family member will naturally manage any inheritance for your children. However, the court makes the final decision about who serves as guardian. According to estate planning experts, the court-appointed guardian may not be the person you would have chosen, and you have no say in this decision once you’ve named your minor child as a direct beneficiary.
Ongoing Court Supervision: Once appointed, the guardian may need to:
- File annual accountings with the court showing all receipts and expenditures
- Obtain court approval for major financial decisions
- Provide a detailed justification for how funds are being used
- File additional petitions each time there’s a significant need
This level of oversight is expensive, time-consuming, and frustrating for families trying to care for grieving children.
The “18th Birthday Problem”
Perhaps the most significant issue with naming minor children as direct beneficiaries is what happens when they turn 18.
Once a guardianship account terminates (typically at age 18 in New York), the full amount of money is turned over to your now-adult child. All of it. At once. With no restrictions, no guidance, and no protection.
Ask yourself honestly: Would you have been prepared to manage $100,000, $500,000, or even millions of dollars at age 18?
Most 18-year-olds lack:
- Financial literacy and money management experience
- Emotional maturity to resist peer pressure
- Life experience to recognize predatory schemes or manipulative relationships
- Long-term perspective to balance current wants with future needs
The consequences can be devastating. We’ve seen young adults:
- Spend entire inheritances within months on cars, trips, or “investments” in friends’ businesses
- Become targets for financial predators and manipulative romantic partners
- Face pressure from extended family members seeking loans or handouts
- Struggle with the burden of sudden wealth without preparation or support
- Lose need-based financial aid for college because of the inheritance
These scenarios aren’t rare exceptions—they’re common outcomes when substantial wealth transfers to unprepared young adults.
The Problems Extend to Young Adults Too
The issues don’t magically disappear when your child turns 18. Young adults in their twenties face unique vulnerabilities that make direct inheritance potentially harmful:
Financial Inexperience: Most people in their twenties are still learning basic financial management. Even responsible young adults may lack experience with investing, tax planning, or long-term financial strategy.
Life Instability: Young adulthood is often a time of:
- Career changes and income fluctuations
- Relationship formation and potential divorce
- Geographic moves and lifestyle adjustments
- Student loan debt and other financial pressures
Creditor Vulnerability: Young adults may face:
- Student loan debt
- Credit card debt
- Medical bills
- Business debts if they’re entrepreneurs
- Potential lawsuits from car accidents or other incidents
Once assets are in a young adult’s name, they become vulnerable to creditors, divorce proceedings, and lawsuits—potentially wiping out the inheritance you worked hard to provide.
The Solution: Minor Trusts and Spendthrift Trusts
The good news is that there’s a better way. By incorporating trusts into your estate plan, you can provide for your children while protecting them from the problems we’ve discussed.
Minor Trusts: Protection and Flexibility for Young Beneficiaries
A minor trust (sometimes called a children’s trust) is a trust specifically designed to hold and manage assets for the benefit of minor children until they reach an age you designate.
Here’s how it works:
How to Set It Up: Instead of naming your child as the direct beneficiary of your life insurance policy or retirement account, you name the trust as the beneficiary. The trust is typically created within your Last Will and Testament or as part of your revocable living trust.
Immediate Access Without Court Involvement: When you pass away, the funds transfer directly to the trust without requiring guardianship proceedings or court approval. Your designated trustee can immediately begin using the money for your children’s benefit.
You Control the Distribution Schedule: Unlike the rigid “everything at 18” rule that applies to guardianship accounts, a minor trust lets you decide:
- At what ages your children receive distributions (e.g., 25% at age 25, 25% at 30, 50% at 35)
- What purposes funds can be used for (education, health, housing, business startup)
- Whether distributions are mandatory or at the trustee’s discretion
- How long the trust continues (it can extend well into adulthood)
Guidelines for Your Trustee: You can provide detailed instructions about:
- How much should be spent on education
- Whether to provide funds for purchasing a home
- How to handle requests for business capital
- What happens if a child has special needs or faces challenges
No Court Supervision Required: Once properly established, the trust operates without ongoing court oversight, saving time and money while providing greater privacy for your family.
Spendthrift Trusts: Long-Term Protection for Beneficiaries of Any Age
A spendthrift trust takes protection a step further by including special provisions that shield trust assets from creditors and protect beneficiaries from their own financial mistakes.
What Makes Spendthrift Trusts Different:
According to estate planning professionals, spendthrift trusts include special “spendthrift clauses” that:
- Prevent beneficiaries from transferring or selling their future trust benefits
- Prohibit beneficiaries from using trust assets as collateral for loans
- Protect trust assets from most creditor claims
- Shield inheritances from being divided in divorce proceedings
The Trust Owns the Assets: This is crucial: with a spendthrift trust, the beneficiary doesn’t legally own the trust assets until they’re actually distributed. Since they don’t own the assets, creditors generally can’t reach them to satisfy debts or judgments.
Protection from Multiple Threats: Spendthrift trusts protect inheritances from:
- Credit card companies and other creditors
- Lawsuit judgments (with some exceptions)
- Bankruptcy proceedings
- Divorce settlements
- Predatory romantic partners or “friends”
- Poor financial decisions
When Spendthrift Trusts Make Sense:
Consider a spendthrift trust when your beneficiary:
- Is young or financially inexperienced
- Has a history of poor money management
- Faces substance abuse challenges
- Has significant existing debt
- Works in a high-risk profession prone to lawsuits
- May face divorce
- Has special needs and receives government benefits
- Is vulnerable to manipulation or financial abuse
Important Note: Under New York law, spendthrift provisions don’t protect against all claims. Certain obligations—such as child support, spousal support, and debts for necessities—can still reach trust assets even with a spendthrift clause.
Beyond Basic Protection: Structuring Trusts for Your Family
Working with an experienced estate planning attorney allows you to customize trusts to address your family’s unique needs:
Graduated Distributions
Many parents choose staggered distribution schedules that provide increasing amounts as children mature:
Example: “The trustee shall distribute:
- Income and principal for health, education, and support until age 25
- 25% of remaining principal at age 25
- 50% of remaining principal at age 30
- All remaining principal at age 35″
This approach provides support throughout young adulthood while protecting the bulk of the inheritance until greater maturity.
Educational Incentives
You can include provisions that encourage education:
- Full payment of tuition, fees, and reasonable living expenses for accredited institutions
- Bonus distributions upon degree completion
- Graduate school funding
- Trade school or apprenticeship support
Professional Trustee Options
While many parents choose family members as trustees, professional trustees (banks, trust companies, or attorneys) offer:
- Financial expertise and investment management experience
- Objectivity when family dynamics are complicated
- Institutional stability and continuity
- Protection against accusations of favoritism or mismanagement
At Fratello Law, we can serve as trustee or co-trustee, providing professional management combined with the personal attention your family deserves.
Multiple Trusts for Multiple Children
You can create separate trusts for each child, allowing:
- Different distribution schedules based on each child’s age and maturity
- Customized provisions reflecting each child’s unique needs
- Protection if one child has special circumstances (addiction, disability, financial irresponsibility)
- Separate management so one child’s issues don’t affect another’s inheritance
Other Assets That Should Name Trusts as Beneficiaries
Once you’ve established trusts for your children, remember to update beneficiary designations on:
Life Insurance Policies: Name the trust—not your children—as the primary or contingent beneficiary.
Retirement Accounts: While there are complex tax considerations with naming trusts as IRA or 401(k) beneficiaries, it’s often the right choice for minor or young adult children. Discuss the tax implications with your estate planning attorney and financial advisor.
Bank and Investment Accounts: Many accounts allow “payable on death” (POD) or “transfer on death” (TOD) designations. Consider naming your trust instead of minor children.
Real Estate: Your Will or living trust should direct real estate into the children’s trust rather than passing directly to minors.
Don’t Forget: Naming a Guardian
While trusts address financial matters, you also need to designate a guardian to raise your minor children if something happens to you. This designation is made in your Last Will and Testament and is separate from the trustee role.
Many parents choose:
- The same person as both guardian and trustee for simplicity
- Different people for each role—someone loving and nurturing as guardian, someone financially savvy as trustee
- Co-trustees to provide checks and balances
The Cost of Not Planning Properly
We understand that establishing trusts requires an investment of time and money. However, consider the alternative costs:
Without a Trust:
- Guardianship court filing fees: $500-$2,000+
- Attorney fees for guardianship: $3,000-$10,000+
- Annual accounting fees: $1,000-$3,000 per year
- Bond premiums: Varies based on asset value
- Lost inheritance due to poor management or misuse: Potentially hundreds of thousands
With a Trust:
- One-time attorney fees to establish trust: $2,000-$5,000
- Peace of mind knowing your children are protected: Priceless
- Assets available immediately without court delays: Invaluable
- Professional management and protection until maturity: Significant long-term value
The numbers speak for themselves. Proper planning isn’t an expense—it’s an investment in your children’s future.
Take Action Now to Protect Your Children
If you currently have minor or young adult children named as direct beneficiaries on any accounts or policies, it’s time to reconsider that decision. Even if your children are currently minors, establishing trusts now means everything is in place if the unthinkable happens.
At Fratello Law, we help Smithtown, Syosset, and Long Island families create comprehensive estate plans that truly protect their children. We will:
- Review your current beneficiary designations
- Discuss your goals and concerns for each child
- Design custom minor trusts or spendthrift trusts that fit your family
- Help you choose appropriate trustees
- Coordinate with your financial advisors and insurance agents
- Ensure all your beneficiary designations align with your estate plan
Our “We Grow With You” philosophy means we’re here for the long haul. As your children grow and circumstances change, we’ll update your plan to reflect your evolving needs.
Your Children Deserve Better Than a Default Plan
Don’t leave your children’s inheritance to chance, court processes, or the financial wisdom of an 18-year-old. With proper planning, you can provide the security and protection they need while giving yourself peace of mind.
The most dangerous assumption in estate planning is that “it won’t happen to me.” None of us knows what tomorrow brings. What we do know is that proper planning today prevents problems tomorrow.
Your children are your greatest legacy. Protect them with an estate plan that truly serves their best interests—not just when they turn 18, but for their entire lives.
Ready to create a comprehensive estate plan that protects your children? Contact Fratello Law today to schedule a consultation at our Smithtown or Syosset office. Call us or visit www.fratello-law.com to learn how we can help you safeguard your family’s future with minor trusts, spendthrift trusts, and comprehensive estate planning.
This blog post is for informational purposes only and does not constitute legal advice. Estate planning and trust laws vary by situation, and you should consult with a qualified attorney to discuss your specific circumstances.