My niece, who is 21 and not the most responsible girl on the planet, babysits a few nights a week for a divorced mom of two elementary-school aged kids. She only sits for about two hours as a gap-filler between the time the dad drops them off and the mom gets home from work. Half the time my niece is “too busy” and my sister fills in for her.
The mom of the two kids told Niece the other day that she wants to make Niece the beneficiary of her life insurance policy because every other person in her life has told her that if she dies, they would give her life insurance money to her ex-husband for the kids. Now, she wants the kids to have the money, and to be able to use it before they are 18 if they need it for school, etc. But she doesn’t want her ex to have any control over it because she fears he will just spend it on things he wants. She feels that Niece will respect her wishes to not give any to the dad and only use it for the kids for college or to give to them when they are adults.
Now I’m afraid that Niece, though a good kid, will be tempted to “borrow” from these funds if they are left to her in her name only. The mom can’t really afford a lawyer to set up a trust for her kids especially since the odds are good she will live until her kids are adults. And really, the odds that my niece will ever need to do anything with this potential payout is slim. The mom is in good health.
So what would be the best way for this mom to designate her children as the beneficiaries of her life insurance and yet not allow the ex-husband access to the funds, even though he would have custody of the children if she dies? I’m just not comfortable with the thought of my niece, who is really only a peripheral person in the lives of these children, barely caring for them as her only duties are to send them to bed, having access to their money and being expected to care-take the money for a few years when she has trouble even paying her bills on time or mailing things out for herself.
She should make the children beneficiaries of the insurance money and have it so they get the proceeds when they’re adults. She probably doesn’t have to pay an actual trustee. She could call her insurance company and see if the funds can be put directly into a trust account if she dies. There are trust accounts that are just like investment accounts except the money can’t be witdrawn until a certain age (my kids had one from the grandparents from American Century) She could set up the accounts now and specify that the money gets deposited in them if she dies in a will that she writes herself if that’s the least she can do. There are also education accounts that no one can touch accept for education. Not sure why she wants it all to be spent before they’re 18, if ex is such a loser he’s not going to be paying for their college.
She can go to an investment company and find out these options for free.
I also wonder if there are lawyers who will write up a will for low cost but a simple will doesn’t cost that much anyway.
She needs to talk to an insurance agent/financial advisor who can tell her how to do it right. This isn’t a new situation to most advisors, who have probably dealt with this a zillion times before, and have probably seen uglier than hers.
I don’t think the mom wants the money completely spent by the time the kids are 18, but that she wants the kids to be able to access it before they turn 18. Is this accurate?
Correct. In case they need it for college costs before their 18th birthday. I think this is a life insurance policy offered through her work…no real agent to talk to.
First off - even if your niece is the most responsible person in the world, if that money is left to her it’s subject to seizure if the niece gets into trouble. What if she’s at fault in a car accident, for example, and gets sued?
The company that handles the life insurance through work should have someone she can contact with such questions. They may just shrug their shoulders and say “dunno - leave it to a trust”, but it’s a reasonable first step.
I would assume she wants to leave it in such a way so that it can be used for the kids’ benefit even before they’re 18 - what about piano lessons, doctor bills, private school tuition, or the like? If so, it would possibly have to pass through the ex’s hands at least peripherally, but a trust could be set up so that the ex has to request disbursements for specific purposes. And, the trustee could be anyone - friend, family, doesn’t have to be the ex.
For what it’s worth, our policies are set up with each other (spouse) as primary beneficiary, but the kids’ trusts as 50/50 secondary.
This is not your niece’s problem, it is the mother’s problem, and it is the mother who needs to seek legal/financial advice. If she cares about seeing her wishes fulfilled, she needs to find a way to pay an attorney/financial adviser to set things up properly.
You may find the insurance company won’t accept your niece as the beneficiary, solving the problem for you. Most insurance policies require insurable interest - i.e. the beneficiary needs to demonstrate potential financial loss in the event the insured dies. Clearly that’s not the case for your niece.
IANAL, but could this be solved by setting up a will, with an independent public trustee as an executor?
If the mother toodles on as she has so far and refuses to hire a lawyer, there’s a decent chance that her ex can get her wishes overturned after she dies. This is a horrible idea, and the best way to convince her of this would be to frame the argument as such. She needs to set up a trust, as stated above. It shouldn’t be very expensive, and it’s the only way to guarantee that the money ends up where she intends it to go.
I’m under the impression that life insurance benefits are never under the direction of a will as they are never actually assets owned by the policyholder. The money goes directly to the beneficiary.
Are you sure about the insurable interest in this scenario?
I’m certainly willing to admit I’m wrong, but I thought that pertained to the person taking OUT the policy - so the niece couldn’t take out a policy on her client’s life with herself as the beneficiary, but the mom could name anyone she chose as long as she’s the one to take the policy out.
For what it’s worth, a trustee doesn’t necessarily charge anything. My BIL is the trustee for our kids’ trusts (funded from a cash gift from a relative years ago) and as far as I know he’s never charged any fees. He has probably charged tax preparation costs, but that’s fairly minor. A for-fee trustee would be if you didn’t have a trusted (hah) relative or whatever, and/or if it was a particularly complex situation.
So, here’s another reason this is not a good idea:
Your niece is babysitting then crazy mom returns home drunk (she sounds like a heavy drinker), trips down the basement stairs and dies. Possibly one of the children pushes her. The CSI guys think something looks suspicious and . . . look at that . . . the babysitter is the beneficiary on crazy mom’s life insurance. Your niece is convicted of murder and spends the rest of her life in prison.
The mom needs to set up an unfunded trust. In the event of her death, it will be funded by the proceeds of her life insurance policy. Since it’s a trust that will have the funds, that is what governs how/when money is disbursed.
If your niece is beneficiary of a life insurance policy I don’t believe she has any legal obligation to give the kids a cent. Moral yes, legal no.
The Mom should make an appointment with the Trust department of a local bank. Most larger banks have officers who specialize in these situations. Normally they charge nothing to set up the trust, but a management fee should the trust come into being.
And while it’s not a great situation, and your neice would certainly be in for temptation of astounding levels; she’s 21 years old, and probably doesn’t need to be protected from life decisions.
Leaving the money to the niece is a really bad idea.
She could take the money and run.
She is the beneficiary, and there is nothing forcing her to spend the money for the kids.
Yes it would be the right thing to do, but a pile of dead presidents often makes people do the wrong thing. Ask any lawyer.
Insurable interest doesn’t come into play here as the mom has an insurable interest in her own life, and can name anyone as the beneficiary. Although the insurance company might balk at issuing a policy naming someone beneficiary who will not suffer a financial issue as the result of the insured death. Once the policy is issued, you can name anyone as beneficiary.
Also depending on what state we are talking about, there might be a valid claim against the policy proceeds by the ex.
Talk to a lawyer.
Does your state have a board for orphans (usually part of the family court) that would decide on how to invest and under what circumstances to pay out the money if the money is left directly to the children only?
What about a priest or a person from a community service which is not only trustworthy, but a bit more older and experienced than the niece?
Do they have community centers where lawyers perform pro-bono-work for people who otherwise can’t afford them?
Does your state / a federal group for families/ an interest group for families offer legally sound standard forms on the internet to download and fill out? (As others have said, this is the first time this problem has come up - the idea of one parent leaving money to the children that can’t be touched by the remaining parent crops up in Sherlock Holmes stories and similar back in Victorian times.)
Or, as is not uncommon for young persons (or people of any age, frankly), fall madly in love with someone who turns out to be less than ideal.
Some people screw over their own kids where money is concerned, it isn’t too hard to imagine a boyfriend or spouse of the niece taking the money and running.
Now, the mom in question could set up a trust with the niece as the trustee, which would obviate the whole boyfriend / lawsuit issue (unless the boyfriend persuaded her to misappropriate funds of course).
I got curious and checked out LegalZoom.com to see if they had do-it-yourself trusts and they do, just not this kind. They have living trusts which are something you set up for yourself (reduces probate issues).
I would bet that there are attorneys near the family in question, who can do a basic will and trust paperwork based on boilerplate text (not customized) for a fairly reasonable fee. Since the mom really should have a will in place anyway, she really needs to look into that. The only “oddness” about the trust would be that the ex wouldn’t be the trustee.
In our case the trust paperwork was more costly, but we had some different issues (special-needs trust for my son, plus non-standard clauses about when the funds would be turned over to him in tneir entirety).
