I recently had an opportunity to work with a military service member who was preparing for an extended deployment to a war zone. He wanted to designate his minor child as the beneficiary of his Servicemembers’ Group Life Insurance (SGLI). He read the instructions for preparing a new beneficiary designation on Form SV8286and saw the warning concerning naming a minor as a beneficiary:
- SGLI will pay the insurance benefit to the court-appointed guardian of the children’s estate, if the beneficiary is a minor at time of claim.
- You can establish a trust for the benefit of the children and name the trust as beneficiary. A trust names a trustee of your choice to be legally responsible for administering the insurance proceeds for the children.
- Naming a trust as a beneficiary on this form does NOT create a trust.
The second to the last thing the service member wanted was for a court to get involved in managing life insurance proceeds for benefit of his minor child. The last thing he wanted was for the child’s mother to have any control over the life insurance money!
A service member may be divorced from or never married to the other parent of a minor child, or may designate a minor as the alternate beneficiary if something should happen to the service member’s spouse. It’s a good idea to think through the various possibilities that could result in a minor child becoming the beneficiary of an insurance policy.
Military service members usually have access to estate planning document preparation from Judge Advocate General (JAG) attorneys. They regularly prepare general estate planning documents such as wills, powers of attorney and advance medical directives, and can prepare a will that contains a testamentary trust to manage life insurance proceeds for benefit of a minor child. In Virginia, a testamentary trust is treated like an open estate, subject to an annual accounting to the county Commissioner of Accounts. The Commissioner’s feefor the accounting is based on the size of the trust estate. For the first accounting the fee ranges from $216 to $10,016 and for the second and subsequent accountings, it ranges from $216 to $7,516! The requirement to prepare and submit the accounting lasts for the life of the trust. That can be a long time, and perhaps a considerable expense in account, legal and CPA fees, if the trust is structured to continue after the child reaches majority at 18.
A stand-alone trust is many times a better alternative to the testamentary trust because it is a private document and does not involve court supervision with annual accountings. It contains the same general terms as a testamentary trust, but it takes effect immediately, thus covering the eventuality that the service member is incapacitated. The trust identifies the grantor as the initial trustee and names the successor trustee(s) who will manage the life insurance proceeds for benefit of the minor child. The trust, not the child, is the primary or contingent beneficiary of the life insurance.
Generally JAG attorneys do not have the time or the expertise to prepare stand-alone trusts. They may recommend the service member seek out a private estate planning attorney to prepare the trust before the JAG attorney completes the other important estate planning documents. It is important to find an attorney who is familiar with the military, and that may not be on attorney websites found by a Google search.
The same planning should be done when the service member has a retirement account (401k, IRA or other defined contribution plan) that designates a minor as a beneficiary. With the prevalence of defined contribution plans, it is quite possible that there are one or more plans out there, even for a career service member who is contemplating retiring on a military pension. An experienced estate planning attorney can draft a Retirement Plan Trust to manage retirement assets for benefit of a minor beneficiary.
