To leave life insurance to a minor child, do not name the child directly on the beneficiary form. Insurers will not pay a death benefit to someone under 18, so a direct designation freezes the money until a court appoints someone to manage it. Instead, route the payout through one of three structures: a custodial account under your state’s Uniform Transfers to Minors Act, a trust you set up with an attorney, or a special needs trust if your child has a disability. The right choice turns on how much control you want over when and how your child receives the money, and how large the death benefit is.
Why Naming a Minor Directly Fails
Minors can’t enter binding contracts, and any contract a minor signs is voidable at their option. No insurance company is going to hand a six-figure check to a teenager under those terms. So when the policyholder dies and the named beneficiary is a child, the insurer holds the proceeds until a court appoints a guardian or conservator to receive the money on the child’s behalf.
That process varies by state but generally involves a petition, hearings, and sometimes a surety bond. Filing fees alone often run several hundred dollars, and attorney costs push the total higher. While the court works through it, the child has no access to funds that might be needed for housing, school, or daily care. A surviving parent doesn’t fix this automatically: legal custody of the child is not the same as legal authority to manage the deceased parent’s insurance proceeds. That authority takes a separate court appointment.
Custodial Accounts Under UTMA or UGMA
The simplest fix is a custodial account under the Uniform Transfers to Minors Act (UTMA) or, in South Carolina and Vermont, the Uniform Gifts to Minors Act (UGMA). You name an adult custodian on your beneficiary form, and when you die, the insurer pays the death benefit into a custodial account that person manages for your child. No court, no attorney fees, no waiting.
The custodian owes a fiduciary duty to invest and spend the money solely for the child’s benefit. The funds can’t be used to cover a parent’s ordinary support obligations like food and shelter; using them for anything other than the child’s needs is a breach of that duty. Within those limits, the custodian decides how to invest and when to distribute.
UTMA accounts can hold cash, securities, real estate, and other property; UGMA accounts are limited to financial assets. For a cash death benefit, either works.
The real catch is the termination age. When your child reaches the age set by state law, the custodian must turn over everything in the account. That age ranges from 18 to 25 depending on the state, with most set at 21.1Social Security Administration. SI SEA01120.205 – The Legal Age of Majority for Uniform Transfer to Minors Act If a large lump sum arriving on your child’s 21st birthday worries you, you want a trust instead.
Trusts: More Control, More Cost
A trust gives you tighter control. You draft a trust document with an attorney, name a trustee to manage the money, and designate the trust itself as your life insurance beneficiary. When you die, the death benefit flows into the trust, and the trustee distributes it according to the rules you wrote.
Those rules can be as specific as you want. You can stagger distributions (a third at 25, a third at 30, the rest at 35). You can restrict withdrawals to education and medical expenses until a certain age. You can give the trustee discretion to make distributions based on need and maturity. Unlike a custodial account, the trust doesn’t automatically dissolve at any age. You set the timeline.
The trustee is legally obligated to manage assets in the beneficiary’s interest, keep records, and account for trust property. Who you pick matters as much as what the trust says. A family member who handles money well, a trusted friend, or a professional corporate trustee are all options, and many parents name a family member as primary trustee with a corporate trustee as backup.
Expect to pay somewhere between $1,500 and $5,000 or more to draft a trust, depending on complexity and location. Trusts also carry ongoing costs: a trustee fee in some cases, a separate tax identification number, and a trust tax return each year if the trust earns income. For a modest policy, those costs may outweigh the benefit of extra control, and a custodial account does the job. For a large death benefit or specific distribution goals, the trust is worth it.
Irrevocable Life Insurance Trusts
An irrevocable life insurance trust (ILIT) is a specialized trust that owns the policy itself rather than just receiving the proceeds. Because you no longer own the policy, the death benefit is excluded from your taxable estate. For most families this doesn’t matter. If your total estate including the death benefit could exceed the federal estate tax exemption, it can.
The tradeoff is in the name. Once you create the ILIT and transfer the policy, you generally can’t change the terms or take the policy back. You also can’t pay premiums directly; you make gifts to the trust and the trustee pays premiums from those gifts. To keep the gifts within the $19,000 annual gift tax exclusion, the trustee sends beneficiaries a Crummey letter giving them a short window to withdraw the contribution, which converts the gift to a present interest for tax purposes.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 ILITs require more setup and ongoing administration than a standard trust, so they usually make sense only for larger estates.
Special Needs Trusts for a Child With a Disability
If your child receives, or might one day receive, Supplemental Security Income or Medicaid, a standard custodial account or trust can disqualify them from those benefits. SSI has strict resource limits, and money sitting in your child’s name counts against those limits. A large life insurance payout received the wrong way can wipe out eligibility overnight.
A third-party special needs trust avoids that result. You name the trust as beneficiary, the death benefit goes to the trust rather than to your child, and because your child never owns the money, it doesn’t count as their resource for SSI or Medicaid. Federal law specifically exempts certain trusts established for disabled individuals from Medicaid’s asset-counting rules.3Office of the Law Revision Counsel. 42 U.S. Code 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets The trustee can then spend the money on what public benefits don’t cover: private therapies, specialized equipment, recreation, travel, better housing.
“Third-party” is the key word. A third-party special needs trust is funded with your money, not the child’s own assets, and at the child’s death generally has no Medicaid payback requirement, so whatever remains can pass to other family members. A first-party trust (funded with the child’s own assets) must repay Medicaid. For life insurance planning, you almost always want the third-party version, and you want an attorney with special needs experience drafting it. Small errors in the document can cost your child their benefits.
What Happens If You Do Nothing
If you name a minor directly or leave the beneficiary blank, the fallback is a court-appointed guardian of the estate (sometimes called a conservator). This is the slowest and most expensive outcome. The appointment comes through a formal court proceeding that may require a petition, hearings, a court-appointed investigator, and a surety bond.4Administrative Conference of the United States. ACUS Study of State Guardianship Laws and Selected Resources After appointment, the guardian operates under ongoing court supervision. Many states require periodic financial accountings, and certain expenditures may need a judge’s approval. The protection is real; so are the delays and fees.
How to Word the Beneficiary Designation
The structure you set up only works if the beneficiary form matches it. Request the beneficiary change form from your insurer and use precise language.
For a custodial account:
“[Name of Adult], as Custodian for [Child’s Full Name] under the [Your State] Uniform Transfers to Minors Act”
For a trust, include the trustee’s name, the full trust name, and the exact date the trust was signed:
“[Trustee Name], Trustee, or successor in trust, under the [Trust Name] dated [Month Day, Year]”
The “or successor in trust” phrase matters. If your named trustee dies or can’t serve, that wording lets the successor trustee in your trust document claim the proceeds without a court order.
Every policy should also have a contingent beneficiary. The primary beneficiary receives the death benefit first; the contingent takes over only if the primary has died or can’t be located. A common setup: spouse as primary, the children’s trust or custodial account as contingent. If both parents die together, the proceeds still land in the structure built for the children instead of in probate.
One more point that trips people up. Your beneficiary designation is a contract with the insurance company and overrides your will. If your will leaves everything to your children but your policy still names an ex-spouse, the ex-spouse gets the money. Updating the beneficiary form matters as much as updating the will.
Taxes on Life Insurance Paid for a Child
The death benefit itself is almost always income-tax-free. Federal law excludes life insurance proceeds paid by reason of the insured’s death from the recipient’s gross income, whether the recipient is a trust, a custodial account, or a guardian.5eCFR. 26 CFR 1.101-1 – Exclusion From Gross Income of Proceeds of Life Insurance Your child gets the full amount without owing income tax on it.
Taxes come in later, on what the money earns after it’s invested. How that income is taxed depends on the structure.
In a custodial account, the kiddie tax applies. For 2026, the first $1,350 of the child’s unearned income is covered by the standard deduction. The next $1,350 is taxed at the child’s own rate. Anything above $2,700 is taxed at the parent’s marginal rate. The rule reaches children under 18 and, in some cases, full-time students under 24 who don’t provide more than half their own support.6Internal Revenue Service. Instructions for Form 8615
Trusts face compressed brackets. For 2026, trust income hits the 37% rate at just $16,000, where an individual doesn’t reach that bracket until income exceeds roughly $626,000.7Internal Revenue Service. 2026 Form 1041-ES A trust holding a large death benefit and retaining all its earnings loses a significant share to tax. Many trustees distribute income out to the beneficiary each year so it’s taxed at the child’s lower rate instead, and your trust document should give the trustee that flexibility.
Review the Setup as Your Family Changes
A designation that made sense when your child was born may not make sense when they’re 15. Review your beneficiary form after any major event: another child, a divorce, the death of a named custodian or trustee, a significant change in finances, or a disability diagnosis that calls for replacing a custodial account with a special needs trust.
As your child approaches adulthood, look again at whether the structure still fits. A custodial account that ends at 21 may be fine for a mature young adult and a problem for one who isn’t ready. If the fit isn’t right, there may still be time to set up a trust and redirect the beneficiary designation. The form itself takes a few minutes. The consequences of leaving it alone can last decades.