If a parent or grandparent names a minor child or grandchild as a primary or contingent beneficiary of an annuity, he or she should be aware that a minor cannot inherit an annuity outright because minors cannot own legal property of any kind in their names. Rather, a guardian must be appointed to manage the property on a minor's behalf until he/she reaches the age of majority, which can be costly, time-consuming, and in the end, may be unnecessary. It also can become a protracted legal battle if the minor’s parents have divorced and both seek custody of the account. Further, if a guardian for the minor is not appointed at the time of the annuity owner’s death, the court will appoint one.
How might circumstances like these be avoided?
One potential solution is to designate a custodian who will oversee the inherited annuity should the annuity owner die before the minor reaches adulthood, and name the custodian as the beneficiary for the benefit of the minor under the Uniform Transfers to Minors Act (UTMA). For example: "(Custodian name) as custodian for (name of minor) under the (state name) Uniform Transfers to Minors Act."
|Using UTMA Stategy
|Not Using UTMA Strategy
|Grandpa Joe Smith
|Grandpa Joe Smith
|Beneficiary Designation on Application
|Ben Sr. as custodian for Ben Jr. under the California Uniform Transfers to Minors Act (UTMA)
|At Owner's Death
|Claim form completed by custodian, Ben Sr.
|Claim form typically requires guardian's documentation obtained through the courts
|No additional cost; court intervention not necessary
|Additional cost/delay involved in setting up guardianship; court intervention likely
In this example, Grandpa Joe Smith listed "Ben Sr. as custodian for Ben Jr. under California UTMA" as the beneficiary on his account application. Upon Grandpa Joe Smith’s passing, Ben Sr., as custodian, would complete the claim form and may elect an inherited account for Ben Jr. under UTMA. Ben Sr. would control and manage the assets until Ben Jr. reaches the age of majority (defined under the UTMA statute for each state, typically between 18 and 21). These actions need not be supervised by the courts. When Ben Jr. reaches the age of majority, the custodianship concludes, and the assets are turned over to him to be used in any manner he chooses.
This solution may avoid guardianship complications but could have adverse tax consequences for the minor’s parents (or whoever claims the minor as a dependent on the tax return). If the minor’s income is above a certain level, then the parent or guardian must pay tax on the excess at the trust tax rates, which are more unfavorable for most filers.
Not all annuity providers will accommodate this type of beneficiary designation, so you will need to reach out to them directly for details.
Whichever way the donor passes on the retirement account assets, leaving an annuity can provide a child or grandchild with a significant financial foundation. Your client should talk to an attorney about a strategy that is appropriate to his/her own situation, and then be sure to make any changes necessary regarding existing accounts to protect the people he/she loves.
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