I have a friend who’s ex-husband passed away. They have a child (now 16) and the child is the beneficiary on the ex-husband’s life insurance policy. The amount is roughly $250,000. My friend is trying to understand the best way to put the payout into an investment account for her child. The child cannot receive the money directly (as we understand it) and she was looking at either a custodial account or a trust. The annual “gift” limit for a custodial account is $17,000 without touching the lifetime gift exemption (this is all stuff I just Googled, so if I’m wrong please tell me…) This makes it seem unlikely that a custodial account is the best way to go here.
All she is looking for is a “middle man” to receive the money so she can invest it for her child. Is there a financial mechanism for this type of situation we’re missing?
There is no federal income tax on a life insurance payout. Some states might tax some of it. If the kid is the designated beneficiary then they get the money, period. Gifts and gift taxes have nothing to do with any of this.
Now Mom may prefer that the kid not receive the money as their own, so that she can exert control over it until the kid is older. But that should have been handled by Dad before he died, via the way he arranged the policy beneficiary. Mom might have zero input now that it’s too late.
I think the specifics of state law, the exact way the policy was titled, and the insurance company’s administrative procedures will all play a large role in what options are available and which one makes the most sense in this specific case. I suggest she seek professional help from somebody licensed in her state. That would be an estate attorney or a certified financial planner.
With $250K on the line, spending a couple hundred bucks to talk to an expert is money well spent.
Typically, a court appointed custodian is needed to oversee the payout to a minor. I’m not sure of how that process works. I would guess that the insurance company would be a good resource to ask about how that all happens. I would assume that the mom could be appointed the custodian until the child is 18.
Some companies have access to financial planners as part of the benefit package. If the mom works for such a company, she may be able to get advice from them.
With just 2 years before the child is 18, how to invest the money may not necessarily be a huge concern. Just putting it into a savings account may be the best strategy. Investing in something like stocks always has the risk of getting hit by a big downturn, which could reduce the value by a lot. Unless she’s really comfortable with investing, it may be best to keep the money in safe place rather than doing something like trying for large gains. Something to keep in mind as she’s considering a custodian and what to do with the money.
[Moderating]
As a request for professional advice, this would be better in IMHO, as a reminder that most of the folks responding won’t be accounting professionals, and even those who are, you have no way of knowing their credentials, they might not know the relevant laws in your jurisdiction, and they probably don’t know all the relevant facts of the case.
There are a lot of options if she’s intent on growing the money safely from investment risk. But she should consult a financial professional to walk her through the options. Spending money on a Certified Financial Professional or a CPA would be money very well spent.
I don’t think this is correct, based on my Googling. Insurance companies cannot pay the benefit directly to a minor.
I believe this is true, and the Mom should petition the court to become said custodian. Assuming she is the legal guardian, this should not be a huge issue.
I think, rather than seeking a CFP immediately, she should speak to an attorney first.
The mom is already the custodian. This was more of tax question regarding a custodial account, but the mom has found out that as long as the origination of the funds is documented (it is) then it does not need to be claimed as a gift and can be put into the custodial account without issue. Much simpler than first though. Thanks for all the replies.
The credit union we use has a financial planner available to all members, so that might be another option. We’re not at all educated or interested in learning about various investment options, so his expertise has been great for us.
Did you find him impartial? I’ve always been extremely leery of “free” financial planners offered by financial institutions, and who they are actually trying help. My elderly aunt moved all her money from CDs & bonds to stocks on one’s advice, right before the market fell in 2002.
We’ve been quite happy with him. We discussed our goals and our preference for a more conservative approach. He has us set up in 3 different products - 2 with guaranteed minimum payouts and another longer-term fund that’s going to pay for the grandkids’ college (we hope.) We never felt pressured - in fact, he’d present several options, answer our questions, and leave the rest to us. I don’t know if it being a credit union makes it different from another type of financial institution, but overall, he’s taken good care of our funds.
I just read my old thread again, and man - the insurance company was even more jerkish than I remembered. (Anyway, my son did get the money when he turned 18 - he invested it and now has a nice nest egg for the future.)