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A common and critical step in the estate planning process is to designate one or more beneficiaries on certain types of financial accounts. Designating a beneficiary on a retirement or investment account, or an insurance policy, grants that beneficiary automatic ownership of those accounts or benefit proceeds in the event of the account owner’s death. However, beneficiary designations can be wrought with peril. While it may seem straightforward to name your children or others as direct beneficiaries, there are several compelling reasons to consider alternative strategies. Here are five reasons why directly naming individuals as beneficiaries can lead to complications, as well as some suggested alternatives to consider:

1. Complications with Minors and Young Adults

Never name a minor as a beneficiary, period. Minors are considered “incapacitated” because of their age. Because of this, minors cannot legally own anything. If your children or other beneficiaries are minors when they inherit your accounts, the financial institution will likely require a court-appointed guardian to manage the funds, which can be a lengthy and costly process. Legal guardianships last until 18 years old, at which point, they are considered adults. For those young adults who may lack financial savvy, sudden access to a significant sum can lead to poor financial decisions or reckless spending in ways you may not intend.

2. Impact on Government Benefits

For adult beneficiaries receiving government assistance due to disabilities or other reasons, receiving an inheritance directly through a beneficiary designation could disqualify them from those disability benefits. Most disability benefits are “means-tested”, meaning the disabled individual must prove an inability to work or otherwise support themselves with assets in order to qualify. When a disabled beneficiary inherits money directly, the government takes the position that the disability benefit is no longer needed, at least not until the inherited money runs out.

3. Lack of Generational Planning

As uncomfortable as it may be to think about, we may outlive our kids. If a child or other beneficiary dies before the account holder does and no further action is taken, where will that deceased child’s share go? Most beneficiary designations don’t cover a predeceased child scenario and the ones that do still might encounter the “minor beneficiary” problem discussed in #1 above.

4. Risk of Creditors and Legal Judgments

Money that flows directly to an individual beneficiary could very well be vulnerable to creditor claims, divorces, and/or lawsuits if that beneficiary is in some sort of domestic or legal trouble at the time they inherit. By naming a child or other individual as a direct beneficiary, that beneficiary has no way to shield their inheritance from creditor claims, lawsuits, or divorces, and could become subject to claims by creditors or legal judgments against them. Further, if your child faces financial issues, those assets could be at risk.

5. Lack of Spendthrift Protection

Without restrictions, a lump-sum inheritance provides no protection against wasteful spending. Certain beneficiaries might not have the maturity to handle large amounts of money wisely, leading to potential financial mismanagement. Plus, there is no guidance offered to the beneficiary on how to spend the money in ways that reflect your intentions.

To address these issues, consider the following alternatives:

1. Trusts

Trusts come in all shapes and sizes from the simple to the complex, but can really earn their keep as a designated beneficiary. Even in simple trusts, you can specify conditions under which the funds are distributed, such as reaching certain ages, completing education, or other milestones. Trusts can also protect the assets from creditors and legal complications of the trust beneficiaries. Supplemental Needs Trusts (also known as Special Needs Trusts) can help protect inherited assets for a disabled beneficiary while keeping their government disability payments intact.

2. Uniform Transfers to Minors Act (UTMA) Accounts

I don’t personally like them as much as trust planning, but for minor children, UTMA accounts offer a way to gift or transfer assets that are managed by a custodian until the child reaches age twenty-one. UTMA accounts are simpler than trusts and there are limitations on how you can direct distributions, but they do protect inherited assets from direct access by minors.


While directly naming your children as beneficiaries might seem like an act of love and simplicity, it’s important to consider the potential legal, tax, and financial pitfalls that can complicate or undermine your intentions. Using trusts, UTMA accounts, or careful guidance in managing inheritance can provide a safer, more beneficial way to pass on your legacy. 

This article was originally posted by Book Law Firm — an estate planning law firm in Carrollton,


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