In today's episode of #TheAmberStittShow, we welcome back Heidi Thompson, Ed.M, JD. We stay on the topic of inheritance and legacies and discuss beneficiaries within this episode. We answer this question on the Show:
Should Minor Children be listed as beneficiaries on your life insurance contracts?
Heidi is a Trusted AZ Estate Planning Attorney and helps her clients Lifeguard their Legacies!
In this episode, we discuss the importance of having a legal and financial plan in place and listing the correct beneficiaries within the contract.
We dive into the nuances of legal terminology and probate laws in different states. Heidi offers practical advice on selecting guardians for children and ensuring that funds are distributed responsibly. Tune in for an eye-opening discussion on how to navigate life's unexpected twists and turns that come along with family planning.
You can find Heidi at https://lifeguardinglegacies.com/ and you can find her book on Amazon here:
You can follow her on social!
Amber Stitt [00:00:11]:
Hello, and welcome to the Amber Stitt Show. I am your host, Amber Stitt, and I am obsessed with helping people get their financial and personal lives in order. Every week, my guests and I explore the fundamentals and practices that will help you stay on top of your game in business, but also at home. I believe we all have different pathways we have to take to reach our peak performance so that we can live up to our peak potential, and this podcast is dedicated to helping you get there. I'm excited to share the insights and habits that my guests and I have cultivated throughout our lives so that we can help you on your journey toward a happy, successful, and fulfilling life. Let's jump right into today's show.
Amber Stitt [00:00:59]:
Hello, and welcome to the Amber Stitt Show. I am your host, Amber Stitt, and we are welcoming back Heidi for part two of the insurance discussions. We're going to talk more about beneficiaries today, so thanks for spending time with me again, Heidi, and breaking down some of this legal speak to help people with their insurance planning. So welcome back.
Heidi Thompson [00:01:19]:
Thank you. It's great to be back. Thanks for having me back on the show.
Amber Stitt [00:01:22]:
So our first episode, we were talking about Secure 2.0 and retirement accounts, taxes, and beneficiaries. And so I wanted to step back a little bit and just talk about going through a life insurance application. And when I meet people, it's usually with a husband and a wife. Not always, but if we have somebody putting together their documents and they're naming beneficiaries, we talk about what a primary beneficiary would be and then a contingent beneficiary. And we have these growing families where they're thinking, okay, I have a young child at home. Can I put them on the life insurance application as contingent beneficiaries? So I know that I have had attorneys walk me through this personally, so I can guide you, but I'm not an attorney that can actually speak to this. So I would love it if you could share with the audience, really, the nature of the primary versus the contingent. And should we be putting minor children on our life insurance applications and contracts?
Heidi Thompson [00:02:21]:
That is a wonderful question, and the answer is easy yes. Yes, you can. The Uniform Transfers to Minors Act takes care of all of that. It allows children to be beneficiaries. It essentially holds funds in trust for their health, education, maintenance, and support, which can be used then by their guardian for their benefit. And there are all kinds of procedures and processes that allow that to happen. And there are definitely good reasons, tax-wise, why you would want to have it directly to them and not to someone else on their behalf.
Amber Stitt [00:02:53]:
I've had people ask me, well, what happens? So this is kind of gross to think about, but in order to claim the life insurance proceeds, we need a death certificate. And so if there is no estate planning done yet, and that child is on the contract. Can you walk me through it? So we're in Arizona, for example. Then who are the players in the scene that then help this minor child set up this trust?
Heidi Thompson [00:03:16]:
Okay, that's a great question. So if you did not do an estate plan, so you just have the insurance policy. It was all to a spouse, and then the spouse is gone. So now it's contingent on the children, which is kind of a standard practice. It will be monitored and kind of controlled by the guardian for the benefit of the child. But the guardian has very strong rules they have to live by that they're not using it for their own benefit. They can get in all kinds of trouble for that. It's both criminal and civil, and it's just an ugly thing. But that does make it so that they can raise the kids without having to worry about how they're going to pay for raising the kids. And so very true, one of the most important things a parent can do if they've got minor children is to make sure there are adequate funds to raise that child. And putting that in life insurance with the child as a beneficiary is good. I would still say having a trust set up where the trust is the beneficiary might be better, but either is good. Either is still going to be better than leaving it to someone else for the benefit of the kid. Because then if you left it to that other person, it's technically theirs. Right.
Amber Stitt [00:04:25]:
It's to their Social Security number. Correct?
Heidi Thompson [00:04:28]:
Correct. So the money came to them, they received it kind of tax-free as a true benefit of life insurance, and now it's part of their funds. And now if they're going to start giving it away to someone else, they're limited to the gift exclusions every year that they're allowed to give away, which is $17,000 per person, which if a kid's going to college, that's not enough. If the kids go to certain private schools, that's not going to be enough to raise them. So it's much better to leave it directly to the child for their management or even better yet, in a trust for the child.
Amber Stitt [00:05:04]:
You brought up a good point. So to a lot of my audience, or maybe clients listening, a lot of times they talk about we're going to do estate planning soon. So I would rather them, of course, get the life insurance over their head. But then what's nice is that we can adjust the beneficiaries once the trust is established.
Heidi Thompson [00:05:21]:
Amber Stitt [00:05:22]:
Do you recommend ever doing just a will and not a trust? Because I think sometimes people confuse the two, and I feel that throughout the process, there are multiple things that are done to protect everything and really document all the pieces of kind of the process. I'll let you speak a little bit about that, too.
Heidi Thompson [00:05:40]:
Sure. Okay. So in states where probate is terrible and where lawyers are allowed to take a percentage of the estate to manage probate, you cannot live with a will. Because if something happens and you end up with a probate estate, a lot of the money to raise your kids is now given to the lawyer here in Arizona, where I do most of my practice. And I practice in both Florida and Arizona.
Amber Stitt [00:06:05]:
Oh, I was wondering about that when you talked about those different states. Okay, very nice.
So Florida is the other place I'm licensed in Florida. Their probate is bad. It was very expensive. The amount the family is given to live on is not in my mind enough for an average family there. I would never recommend doing will-based planning. I would not recommend it there. Here in Arizona, we're a very senior-friendly state. We have a lot of laws and things that can protect people. So it's a very individualized conversation as to whether or not a will-based plan is going to work for you here. But I say will-based plan. I don't say just a will. It's still a plan. You're going to talk about each of your assets. You're going to talk about what beneficiary is on each asset. You do a beneficiary deed for the house. It's a plan where you're planning for each asset, and how it's going to pass. And then if the minors are the beneficiary of the life insurance, that can be a piece of that conversation. The will does allow you to assign a guardian, which in my mind if you've got minor children, the two most important things you can do for that minor child is assign the guardian and make sure you've got life insurance to raise them. Those are the two most important things here in Arizona. If you had to go through probate, it would not be the end of the world.
Amber Stitt [00:07:20]:
Sure, but I mean, you bring up a good point about being able to have money for the children. If you have the ability to assign a guardian, that's wonderful that you have someone that you trust. But gosh, what if they don't live in the same state? Because we have people all over the place, so we need to have enough funding for all the steps just in case. And I think a lot of financial planners just talk about college funding. What about everything up before? Even college could exist for just basic needs to and from household or like, extracurricular activities.
Heidi Thompson [00:07:51]:
Yes, they add up, and get expensive sports as a kid.
Amber Stitt [00:07:57]:
And that's the thing. Like, a lot of needs-based planning is just what do we need? And it's a multiplier off of a salary. But let's really talk about all the things from daycare, private school, whatever else they might need, the extracurriculars and just getting someone to and from all these activities. I mean, we need people running, driving the vehicle there's a lot going on, especially if there are limited people available. We have to make sure there's enough to even hire for some of the things that we want our families to have.
Heidi Thompson [00:08:25]:
Well, and remember, you might not have given a 16-year-old a car as a parent, but if you're not there as a parent, you might want to leave that 16-year-old a car so that they're not as much of a burden on the guardians to drive them everywhere. So the planning is entirely different when you're talking.
Amber Stitt [00:08:44]:
I love that you say that.
Heidi Thompson [00:08:45]:
I'm not here to do it myself, what would I want to be different for my child? What would give them the best edge they would have if I'm no longer the one? There are so many pieces to that and yes, the hardest one is picking the guardian and it's the most important one.
Amber Stitt [00:09:00]:
What age is the guardian? Because if we're having children older, there could be an older guardian available. So then that car, you make a perfect point. What if the guardian is at a certain age in their 70s, shouldn't be?
Driving the kid all around? I know. So you make some perfect points. So thanks for clarifying that because I know in my head I kind of go one way and get excited about the topic, but kind of bringing it back to some of the basics is very important.
Heidi Thompson [00:09:25]:
And let's just talk guardianship for a second. People that are kicking that around often have ideas about what they think the guardian should be. And here's really what you want. You want someone who's going to love your child through the most difficult possible time of their life. That's the main thing. You can give the money honestly to someone else to manage for them if they're a bad money manager. There's a lot of other things you can do as part of your plan to help those kids. But the most important thing is who's going to love the kid through the most difficult time of their life.
Amber Stitt [00:09:56]:
Heidi Thompson [00:09:57]:
Second to that is going to be who's going to keep their life as close to what it was before as possible? Can they attend the same school, be with the same friends, and have that stabilizing force in their life? Or are they going to be shuttled five states away to a brand new place to start a brand new life? There are so many pieces to this and the worst thing you could do is not make the decision just because it's a hard decision. Because then you're left with one of three scenarios. One scenario is there's only one person willing to take the kids and they go. And that's the best-case scenario at least. Or you've got more than one person willing to take the kid and they're not fighting it out in court, in which case the kid might be placed temporarily in foster care until that is settled during that very vulnerable, horrible time of their life. Or third, nobody's fighting for them, and now they're in foster care.
So the best thing, I mean, truly, the most important thing you can do is to make sure you've made that decision so that a court never has to and your kids never left with the feeling that nobody wanted them or that they're being pulled in lots of directions. Yeah, that's sorry, I didn't mean to go on that side topic.
Amber Stitt [00:11:06]:
Right. So now my heartstrings are tugging. I'm just picturing things that are set up. And the other thing too, I always was kind of curious because I don't always see the other side asking the guardian permission, would you be my guardian? Because they have their own jobs, their own families, their own resources and finances, and if you add 1, 2, 3, 4 additional children to their situation, there's a courtesy probably that needs to happen, too, to make sure that it makes sense for the guardian versus just a backup plan. Because we didn't make a plan as you said.
Heidi Thompson [00:11:38]:
It is definitely important to have that conversation and to talk about how it would work to have some deeper conversations around it. I know it's uncomfortable, and the reality is it's not like it's a high likelihood that you're going to lose a parent during your minor years, but we all know somebody who did. It's an important discussion to have and to make sure that those people are really comfortable with the roles they'd be taking on, that they'd be able to have the strength to be able to get your kid through that very difficult period. And we're going to be adjusting to the hardest loss of their young lives.
Amber Stitt [00:12:09]:
Yeah. You don't want them to feel more abandoned while the adults are sorting out the admin. I mean, they won't understand that. So to kind of close up the minor speak, the talking about it, why wouldn't you put I know the answer, I think, but why wouldn't you put the adult sister, somebody else on contingent because they're going to handle the money for your child. Why wouldn't we want to do that?
Heidi Thompson [00:12:33]:
Well, first of all, then they're not tethered to the rules about protecting it for the child. That's the first thing. It's now their money. If they wanted to go buy themselves a new car and a new set of shoes, there's nothing that would stop them. They're the beneficiary. Legally, you can't they would never do that.
Amber Stitt [00:12:56]:
No, I've heard stories from my family law attorney friends.
Heidi Thompson [00:13:02]:
Yes, absolutely. They have the best stories. Family law attorneys have the best family stories. But the truth is, yes, you don't want to leave it to the sister who has no tethering to how they have to spend the money. Second, anything they want to then turn around and give the kid they're going to be limited to the gifting limits, which, again, is 17,000 per person. Right now. You don't want them limited to that. You want the full money to be used for your kids, and it's better to leave it to them directly to be distributed under the Transfer to Minors Act, where the adult in their life is responsible for following the rules with the money and can't be selfish with it.
Amber Stitt [00:13:37]:
Perfect. I really wanted to place a resource for clients that are needing to know more about this. I really appreciate that because this will be a timeless episode for sure. We talked in our first episode about Secure 2.0 and these people that are under eleven years of the person that holds a retirement account. So the children, the adult children receive funds. And let's talk a little bit about how that plays out in the household as an older person receiving funds as a beneficiary.
Okay. All right. So, yeah, let's talk about that. And actually, that kind of gives me a chance to bow back to that will and trust discussion as well.
So very often what I'll tell a young couple who has young kids is, you don't have a lot of money right now. You've got the life insurance to take care of your kid. We're assigning the guardians. We're in Arizona, so we're not worried about probate. So, yeah, we can start with a will-based plan for right now. We know that things will be used appropriately with the beneficiaries, just like we just finished talking about. But when your kids get to be 16, 1718 years old, and you know their personalities, and you already have a sense for whether they're going to be very good with money or not, that is when it's probably time to pull the plug and get a trust. At that point, you've got more money, and then you can start looking at what are some good distribution provisions. Because let's picture it, under the Uniform Transfer to Minors Act, at 18, they're getting the whole amount in their pocket. How many 18-year-olds are good for a quarter of a million dollars or more?
Amber Stitt [00:15:11]:
I know I mentioned working with kind of a round two of estate planning. We have provisions set up for special cases. I'm not going to put it on air because I don't want anyone to know exactly. I don't want my kids to know what the plan is yet because I don't want them to get any ideas. No, but there are smart ways to turn on different levers. And is the general term spendthrift, or is that outdated or is that still something that people talk about?
Heidi Thompson [00:15:34]:
Spendthrift is still the legal term. We don't tend to use it much with full people. But yes, the idea is we just don't trust the kids to receive. When I use all of my lifeguarding language and all my beach things, I talk a lot about pirates in the Caribbean. And I call leaving that inheritance to your kids the Pirates curse, just like the Treasure of the Black Pearl. Remember, they yes, it's that same kind of curse you've just left your kids because they're just going to be the lottery winners. Nine out of ten lottery winners are more broke two years after they bought the ticket than they were before they bought the ticket. The same is true when we leave a lump sum to our kids and they don't have the maturity. And think about it. When in your lifetime do you get a huge lump sum of cash? Very often, we're not conditioned to be able to deal with that and budget for it and save with it. They blow through it, they party too much, they buy fancy cars, they don't necessarily buy the house, and they don't necessarily save any for retirement.
Amber Stitt [00:16:42]:
This has always been an issue, but I can imagine it to be even worse now because of the competition people feel they need to have on social media, too, to just drive this need to be successful for others and not really starting with themselves. We can see that trend a bit. And then there's also the maturity levels. And it's just they say kids up through age 24, 25, the brain developing, there's all these things that are outside of my wheelhouse well.
Heidi Thompson [00:17:07]:
And the most recent one that is for young men. They're saying as late as 28. Now, I know it was 20, they're saying as late as 28, 25 to fully develop and the good decision making. And I think the longer we allow them, and I'm as guilty as this, the next person to live at home as young adults and where we are covering for them to help them get on their feet because it's so hard to get independent, the less capable they are of receiving that distribution. Young. So I'm very much a believer in if you're going to do a lump sum, have the lump sum be after 40, and in the meantime, have either smaller lump sums that give them practice with it, or just give them distributions monthly, quarterly, annually that are going to help them get along and survive. But still maybe not enough that they can quit work.
Amber Stitt [00:17:59]:
It's too much responsibility. And there's got to be that need for us to provide that work ethic, giving them the reason to produce. And that feels good when you do that. But this is not emotional. What you're saying is, here's how it works, here's what we can do with the law and here's the provisions. These are tools and resources that you can build in while you're healthy and well, to just have a good plan and process. And that just can help anybody in your life. I mean, we just know in general, it's always good to have a process and a system, but there are resources. So kind of getting over the overwhelm and then really looking at this and I know we've done it, but it feels really good to have this all set up and done. I wasn't even thinking about it being actually fun, Heidi. So I like that you make it a little bit more easier to kind of swallow all the steps.
Heidi Thompson [00:18:48]:
Well, your trustee can still provide for all the big events in your young adult child's life. So it can possibly fund a first wedding, first home purchase, down payments, that car when they're a teenager if that's necessary. It can take care of a lot of things very specifically. We can also kind of fun and have a little bit of control over things we don't want them doing.
Amber Stitt [00:19:13]:
For example, tell me more.
Heidi Thompson [00:19:17]:
Do you lean toward control? I lean toward control. The most worn-out album as a teenager was Janet Jackson's Control. There you go. For sure. But the idea of being able to have things in place. Our trustee will consult with you to make sure that any path you're going to study in college goes toward an actual occupation so that we don't have people necessarily majoring in gender studies that are going to do something other than teach. Make sure that or basket weaving or whatever that is. But the idea is that you're going to get a real degree you can use for a job. So we can have those kinds of things in it. And actually, it's interesting we can even do things for people that are of really strong faith that the distribution is contingent on marrying inside the faith. We can do that. What we can't do is encourage divorce. That's against public policy. So we can't say you have to divorce in order to inherit that. We can't do that.
Heidi Thompson [00:20:23]:
We can also do things that are contingent on employment. So if they're not being employed, there's no distribution or if there's drug use, there's no distribution or any number of other things that can really provide that extra protection. Not to mention this is the only insurance I sell, okay? The only insurance I sell gets this and it's free. It's part of a trust. And it is if your trustee presumes that your child is not their own trustee because it doesn't work there, but it works any other time. If your child is going through a divorce, bankruptcy, or a lawsuit of some sort, your trustee can actually pay their bills directly, buy them a boat, and send them on a nice vacation, nothing ever hits their account that becomes attachable from that inheritance money. So I call this stupidity insurance. It's the only insurance I sell as part of it's free.
Amber Stitt [00:21:21]:
Well, it's free. Someone else is buying it for them. Oh, that's so interesting. Again, we cannot predict what can happen in the future, but there are so many ways that we can build these measures.
Heidi Thompson [00:21:35]:
And so you think about your product, your life insurance. We just stretched it out in 10,000 different ways.
Amber Stitt [00:21:41]:
So unless we set up something that's irrevocable, we can amend and adjust the revocable. And traditionally the policies that my clients are buying younger are typically that revocable in nature. So we can update as things change. But once you establish that trust and put the trust there, you don't have to keep updating the contracts. Like life insurance, the actual trust itself can be amended, correct?
Heidi Thompson [00:22:04]:
Correct. And the beneficiaries will stay the same. So it'll always use the same name and date that the original trust was established. No matter how many times you changed it, you don't have to change the things you funded to it. So when you put your house in it, it stays that. Your life insurance in, it stays that. Even though you might change the terms, there you go.
Amber Stitt [00:22:22]:
So that's a little bit less work. Once you get that set up and have that trust on there, then you can work directly with amendments or however, you call it in your world. But I have had kind of not a funny story, but a friend of mine who's an HR manager tells me that there are so many beneficiaries not updated and a lot of divorcees forget and then oops, someone else is receiving the funds. So would you recommend maybe an annual review of your own contracts is always a great idea? Maybe annually at least.
Heidi Thompson [00:22:53]:
Yes, I hear you. So I tell people they need to probably speak to me every three to five years or with any major life change. So life change, being a divorce, a move, a big job change, those are good times to just kind of revisit. My clients are actually going to get automated six weeks of homework and emails every two years that walk them through a checklist of things that they need to look at over a six-week period. That makes it easy and digestible. That's just an automation I have set up for my clients that's been kind of easy to deal with. But I'll tell you a true story. My son-in-law's grandmother was one month from getting married in her senior year. She was having a silver marriage. Nice. And the man no, it's not nice. It's a sad story. The man suddenly had a heart attack a month before the wedding, and he had never updated his beneficiaries. And so everything went to his ex-wife. Everything went to his ex-wife. It's a cautionary tale. You need to make sure your beneficiaries are up to date. If you haven't done it in the last year or two, take a look. It only takes a few minutes to either look at the policy or call your advisor people and look and see what needs to be fixed.
Heidi Thompson [00:24:06]:
Well, that's not the best story, but maybe that'll be a reason to take some action. If there's anything unsettled out there for you, that's an easy thing we can do as a takeaway from this episode is just audit. And I always say audit your accounts and also just build. You talked about a binder before. And I always say to people, treat your house like a business and put things on a dedicated system online that your people, that you trust, whoever. As we talked about trustees, but have a place for them to go, whether there's a hard copy in the house, but also a system online, because you never know when you need to pop in and grab something and you might not be home to do it.
That's exactly right. No, I'm 100% in agreement on that. My clients get a free subscription to mylifeandwishes.com I remember looking that up. This is a local guy who created this program. He spent two years working on security to make sure you could put secure things out there and not have to worry. So it's got 16-digit encryption for each account. Anybody can sign up for this for $79 a year, but I buy it for my clients. I love it because I can preload their documents. I can preload their key contacts and their CPA so that their trustee can take over easily. They can then put in all of their accounts. They can put in all their passwords. It can literally be a click here when I die. If they use this account to its extreme, that's wonderful. And they can have authorized users, and trustees. It's really a cool system. So I didn't create it, but I do use it.
Amber Stitt [00:25:32]:
I remember us talking about that. So that would be another benefit of those that are in Arizona for working with you. But we keep talking about processes indirectly, really. And there are so many steps that we can put into place to help ourselves and our families and build out that legacy. So I just love that. And I'm so happy that I met you through women in insurance and financial services. So a shameless plug for the Phoenix chapter. But I talk about building community and how it's so important to just get out there and meet people and see how we can help each other out. So you've certainly helped my clients today, Heidi, so I really appreciate your information on the show, and then I'll be seeing you soon. So anything else you can think of outside of checking out your book for today? I'll link up everything.
Heidi Thompson [00:26:14]:
Definitely check out the book. When we were talking about the distribution provisions for the older kids.
Amber Stitt [00:26:20]:
Heidi Thompson [00:26:21]:
I've actually got a whole grow-up plan, a sample trust in there, starting on page 92. So if you do have minor kids or young adult children, check that out. It might be useful to kind of get an idea of what that would look like in print. And then for WIFS, I'll put in. A shameless plug too. Do you want to have some of the best money conversations with smart women? You've got to go check out WIFS if you're in the Phoenix area. Our Phoenix chapter, it's a rocking group of women. I just absolutely enjoy being around them. So, yes, more to come.
Amber Stitt [00:26:54]:
We're excited about the rollout of a lot of these events for this year.
Heidi Thompson [00:26:57]:
And next, thank you for providing this great content to your listeners and letting me be a part of it today.
Amber Stitt [00:27:03]:
Thanks so much, Heidi, for being here. Thanks to the listeners too. Have a great day. Thank you so much.
Amber Stitt [00:27:11]:
Thank you for joining us on today's episode of The Amber Stitch Show. For more information about the podcast, books, articles, and more, please visit email@example.com. Until next week, enjoy your journey at home and at work. Thank you for listening.