Q. I would like to name my young grandchildren (ages 3–10 years) as beneficiaries of my estate and my life insurance. Is there anything I should know about this plan?
A. Yes. Your wish to do so is commendable, but it is important to make a plan that does not involve leaving assets directly to them while they are minors, i.e. under the age of 18. Here’s why:
First: Assets cannot be left directly to a minor under California law. If you were to do so, it is likely that a court would need to appoint a guardian to hold and manage their money. The court proceeding, itself, will cost your estate, and the court-appointed guardian may not be someone whom you would want to oversee your grandchildren’s money. Further, the guardian may have to file annual accountings with the court, generating more costs and fees.
Second: Each minor will be entitled to the funds from the guardian when he or she reaches age 18. There would then be no limitations on what the money could then be used for; so while you may have wanted the money to go toward college or a down payment on a house, your grandchild may have other ideas.
That said, there are basically two ways to do this properly under California law:
1) Name a Custodian for the Minor under CUTMA: Under the law in California, and many other states as well, you can leave a gift to a minor by using the California Uniform Transfer to Minors Act (“CUTMA”). You would do so by expressly reciting that the gift is made pursuant to CUTMA with appropriate recitals to that effect, and name an adult Custodian for the minor(s). The recitals are in the form of a simple Declaration, and banks and brokerage houses usually have forms for this purpose readily available for use. The key portion of those declarations would recite the name of the Custodian (and/or alternate custodian, if desired), the name of the minor beneficiary, and the key words,
“I hereby transfer to [name of adult] as custodian for [name of minor] under the California Uniform Transfer to Minors Act, the following …[description of custodial property].
You would then sign and date the form. Note that under CUTMA, you cannot defer the actual ownership of the gift beyond the minor’s age 21, as you could if you opted to leave your bequests in trust.
2) Leave the Gifts in Trust: You could leave the gifts to your minor beneficiaries by creating (or modifying ) a trust, and designating the Trustee to hold and manage the gifts until each of your grandchildren reaches the age at which you would like them to have full access. Unlike a gift using CUTMA, in your trust you can be creative as to when each grandchild receives their gift. Examples: it could be all in one lump sum at, say, age 25, or it could be in stages to correspond with their anticipated needs as they begin their own careers, e.g. 1/3 at age 21, another portion at age 25, and the balance at age 30.
If you do create a trust, remember to name the trust as beneficiary of any life insurance or retirement plans. If you forget to take that step, the money may be distributed directly to the minors, negating the work of creating the trust.
To create (or modify) a trust to accomplish your wishes, consult with your attorney.