Estate planning: Minors as beneficiaries to retirement and insurance accounts

How should I name the beneficiary of my retirement accounts? My children are 9 and 5 years old. Should I name them? What happens if I have another child?

Estate-planning clients frequently ask about the proper designation of a beneficiary on their non-probate assets, such as life insurance and retirement accounts. Often, they want their heirs to inherit the non-probate asset. When those individuals are minors, certain issues need to be considered in weighing not only the tax consequences, but other issues such as the ability of the child or guardian to have access to the funds.

Understanding age

The first question is what constitutes the age of “majority” in New York State. The answer: it depends. For the purpose of a Uniform Gift to Minor’s Act or Uniform Transfers to Minors Act, the account terminates, and the minor takes control of the account, at the age of 18 and 21, respectively. The age of termination of the account is not necessarily the same as the age of majority, which refers to the age at which a person is legally competent to sign contracts. Although the age of majority for contracts is 18, for Uniform Transfers Act and also child support purposes, the age of majority is 21.

Insurance contracts are treated somewhat differently. New York Insurance Law deems a minor above the age of 14 years and six months competent to be the owner or donee of a life insurance policy. This means that not only can a parent, grandparent, or anyone else name the over-14 ½ minor directly as a beneficiary, but that the same child is deemed competent to contract for, own, and exercise all rights relating to a life insurance policy. A child below that age lacks the capacity to purchase, own, or be the designated beneficiary of a life insurance policy. Nevertheless, a child under 14 ½ years may be a donee of a life insurance policy pursuant to Uniform Gift Act or Uniform Transfers Act. In order to effectuate such a designation, the adult may make a gift of the policy indirectly to a child by designating a custodian to receive, hold, and manage the gift on behalf of the child until he reaches the age of majority. A living trust can also be the owner or beneficiary of a life insurance policy and hold that policy for the benefit of any person, including a child under 14 ½ years. Alternatively, the life insurance policy can name a testamentary trust or living trust as a beneficiary, with that trust in turn being for the benefit of any individual, including a minor younger or older than 14 ½.

Using an Uniform Transfers Act means, however, that the child will technically have access to the account when he is 18, which may still not allow a level of maturity necessary to manage a large sum of money.

Retirement accounts

Additional considerations come into play when addressing the disposition of a retirement account (referred to generally herein as an “IRA” although also applicable to ROTH IRAs and 401(k) plans). Certain options would allow the IRA to grow tax-free and avoid a lump-sum payment of income tax. As with life insurance, one option is to name a custodian under an existing or not-yet-created Uniform Transfers to Minors Act account as the beneficiary of the IRA. The named custodian can establish a new inherited IRA in her the name of the custodian for the benefit of the minor, into which the primary IRA is “rolled over.” The IRA owner may also name a living trust or a testamentary trust as the designated beneficiary. However, the trust must have specific language to qualify as a “conduit” or “accumulation” trust in order to be a recognized repository for the IRA that would allow the proceeds to “stretch out” and grow tax-free until withdrawn. If the custodian makes a timely election (on or before Dec. 31 of the year following the account owner’s death), the inherited IRA will stretch over the minor’s lifetime and required minimum distributions (the minimum amount you must withdraw from your account each year) will be calculated on the minor beneficiary’s lifetime.

With a Uniform Transfers to Minors Act account, the custodian will receive the annual minimum distributions as custodian (ideally, to be deposited into a separate Act bank account). Once that minor reaches the age of majority, he will have full access to the IRA and the bank account, allowing him to continue holding the inherited IRA (the smarter option) or withdraw all remaining funds. This type of unfettered access at the young age of 21 may not be desirable. Accordingly, naming a trust as beneficiary may be the better option.

Terms of the trust

The U.S. Treasury imposes four requirements which must be satisfied for a trust to qualify as a beneficiary of the IRA for tax purposes: (1) the trust must be valid under state law; (2) it must be irrevocable or become irrevocable upon the death of the account holder under the terms of the trust; (3) the beneficiaries must be identifiable from the trust instrument; and (4) the beneficiaries or their representatives must provide to the plan administrator or custodian either a copy of the trust instrument or provide a certification that the trust complies with these regulations.

The terms of the trust must comply to establish what is known as a “see-through” or “conduit trust” in order to permit the “stretch-out,” meaning, calculating minimum distributions based on the minor beneficiary’s presumably younger age. The designated beneficiary must be an individual and not an entity because an entity (such as the estate, a charitable organization, or a trust) does not have an actuarial lifespan to determine minimum distributions. If the trust is drafted as a conduit trust, it allows the plan to “see through” the trust to its beneficiaries. If a trust is for the benefit of one beneficiary, his age is used to determine the minimum distributions. If there are multiple beneficiaries, such as in a “sprinkle” or “spray” trust, the minimum distributions are determined by the age of the eldest beneficiary.

If the trust does not meet the requirements, then it is deemed to have no designated beneficiary for the purpose of the “stretch out” and the IRA must be withdrawn within five years (if the participant has not yet reached the age of taking minimum distributions) or based on the owner’s calculation if the owner had been taking the distributions at the time of his or her death.


Many trusts for minors are drafted to allow discretionary distributions, with mandatory or forced distributions only at certain ages. This can present problems for the purpose of calculating the minimum distributions. In determining the minimum distributions through a trust, the designated beneficiaries are reviewed as a snapshot upon the death of the original owner. For example, if the trust states that distributions may only be made at age 25, and the minor is currently age 12, the plan administrator must also look at the contingent beneficiaries. In the case of a minor at the age of 12, who has no siblings, although the trust terms may say the contingent beneficiary is to the child’s issue, since the child has no issue at that snapshot of time, the contingent beneficiaries will be that child’s parents and therefore the eldest beneficiary for the purpose of determining the minimum distributions will be one of the child’s parents, thereby losing the intended stretch-out of the IRA. In order to cure this defect, the draftsperson might consider naming another younger family member as the contingent beneficiary of the trust; however, in doing so, it may lead to an unintended beneficiary receiving the corpus of the trust.

The better option may be to use a conduit trust. By definition, a conduit trust requires that all minimum distributions received in the trust must be distributed to the beneficiary or beneficiaries. In the case of a legal minor, they may be distributed to the child’s guardian if the trust instrument allows the trust to distribute funds on behalf of a minor to the guardian. If the child has siblings, particularly if those siblings are older, the draftsperson might include terms that allow the minimum distributions to be distributed to and among the minor beneficiary and his or her siblings. In such case the minimum distributions will be calculated by the eldest beneficiary as mentioned above. The key to a conduit trust is that the instrument must require all minimum distributions to be distributed out of the trust to designated beneficiaries, even if the trust accumulates income from other sources.

Some plan administrators will not permit the designation of a trust as beneficiary. They may also require certain terms to be included in the trust instrument, or may prohibit an inherited IRA stretch-out. As always, you should consult an attorney before making any decisions that impact your estate plan or the legal consequences of naming a beneficiary.

Alison Arden Besunder is the founding attorney of the law firm of Arden Besunder P.C., Find her on Twitter @estatetrustplan and on her website at