Life Insurance Custodian: What Is It? Do You Need One?

I’ve worked hard to ensure that my children will be well-cared-for in the event of my own untimely death. The last thing in the world I’d want is for my careful plans to fall flat. I want my children to have the safety net I create for them.

If you have life insurance and minor children, you absolutely must understand the role of the custodian as it relates to the policy benefits you wish to pass along to your survivors.

Designating a custodian is part of planning for the unexpected.

A custodian is the (trusted) person who will manage the distribution and safekeeping of any financial assets designated by, say, a life insurance policy or a will, to a child while he or she is still a minor.

It’s a big responsibility, so knowing a custodian’s role and how to select the right one can seem daunting… which is precisely why we’re going to explain more about this important process.

What is a custodian?

A custodian is a person who guards, protects, or maintains (not all that different from an Avenger if you think about it…) financial assets. In the context of insurance, the role of the custodian is to “guard and maintain” any asset left to your minor child until he or she reaches the age of majority. For example, when an individual applies for a Haven Term policy, if he or she indicates that their beneficiary is a minor, we require a custodian to be named. In the event of your death, once your child reaches the age of majority, the custodian is required to turn the assets over to the child. The age of majority (also sometimes called “coming of age”) is 18 in most states, but can be as high as 21.

A lot of responsibility comes with this nine-letter word. Consider these powers that are held by a custodian:

• Make withdrawals from the assets for the benefit of the minor (for items such as tuition, educational expenses, medical expenses, etc.)
• Manage the overall custodial account for the best interest of the minor (this is also known as a “fiduciary” relationship)
• Purchase stocks, mutual funds, bonds, or other investment securities on behalf of the minor

How is a guardian different from a custodian?

While they may sound similar, there are some key differences between the role of a custodian and that of a guardian. A guardian functions as something of a substitute parent (in the event both parents died) and is usually named in a will. A guardian would have legal custody over a minor child, so her influence extends beyond the handling of a policy payout. It is possible to name an individual as both a custodian and a guardian.

When do you name a custodian?

You need a custodian when you have minor children and any assets that may pass to them.

Under certain state laws, a minor may not be able to legally own financial assets in his or her own name. This becomes a problem when you name a minor child as a beneficiary under a life insurance policy or in your will.

If you have minor children, a custodian helps you ensure that insurance proceeds or other inheritance benefits (typically from a will) can be transferred according to your wishes. The Uniform Transfers to Minors Act (“UTMA”) allows for proceeds left to a minor to be maintained by a custodian until the minor reaches the age of majority.

One key point that is often overlooked: even if there is a surviving parent, he or she does not automatically become the custodian for the purposes of your life insurance policy, even if they are named as the guardian of that child in a will.

What happens if you don’t name a custodian?

Maybe you’re torn between which of your siblings to choose or maybe you just don’t want to hurt anyone’s feelings. Wouldn’t it be easier not to choose anyone? The short answer to that question is no. Despite what could be an uncomfortable decision for some, failing to name a custodian could have serious consequences.

If your minor child is named as a beneficiary to an insurance policy or other assets, and you have not designated a custodian, your child may not be able to access those assets until reaching the age of majority. This result is exactly the opposite of what you intended when you decided to purchase insurance or leave assets for the benefit of your minor child, right?

Another consequence of not naming a custodian is that a probate court may appoint a guardian for your child and allow that guardian to be the custodian of assets. Nobody wants this result as it is time-consuming and expensive, and leaves a critical decision up to the courts.

Who will you name as custodian?

Now comes the (potentially) hard part for a parent: choosing a custodian. As you can see from the role of a custodian and the importance of that person’s work in your child’s life, this is not a trivial decision.

Your choice is, of course, personal, and as unique as your family. Even so, some guidelines can be helpful in the process of choosing a custodian. But it really all begins with a single word: Trust. Do you trust this individual with the responsibility of looking out for something as priceless as your child’s well-being?

A number of candidates may come to mind right away. So, here are a few questions you can ask yourself (along with your partner) to help narrow down the list: Is this person knowledgeable when it comes to finances? Will she or he be comfortable providing investment advice and handling any financial or investment decisions on behalf of your child? Does this person have the time to handle the responsibility fully? Does your chosen custodian want the responsibility? Some do not, and it is better to know that up front.

How to ask someone to be your child’s custodian

Okay, so it’s time to pop the question. How exactly do you ask someone to be your child’s custodian? After all, accepting the responsibility is just as big a decision as choosing a custodian.

Asking someone to be a custodian is not a beat around the bush type of question. It’s best to be direct here. With something of this importance, make sure you clearly state what you are asking, what it entails, and why you have chosen this person. Need a script? How about this:

“Alice, Mike and I have something important to ask you. We have given this a lot of thought, and we would like you to consider serving as a custodian for little Bobby and Cindy. This means that if Mike and I both pass away before Bobby and Cindy reach age 18, you would be responsible for managing the money or fund that we are leaving to them until they come of age. We are asking you because we trust you, know that you would act in the kids’ best interests, and know that you understand how to handle money. We know this is big deal, so please take some time to think about it.”

Not so hard, right? Be ready to answer questions and wait for a bit for an answer. Oh, and, you know, use your and your children’s actual names.

How do you name a custodian?

The logistics of naming a custodian for a life insurance policy are simple. Once you advise your life insurance provider that you would like to name a custodian and set up a custodial account under the UTMA, the company will provide you with the necessary forms. Your estate planning attorney can assist with custodianship issues relating to other assets.

It is good practice to review your decision from time to time. Situations may change, and you may no longer want the custodian you selected, or that custodian may no longer want the responsibility. Or perhaps an older child has reached the age of majority and you would prefer that he or she become the custodian for a still minor sibling. Whatever life throws your way, consider how it might affect your custodian decision and update/review your plan on a regular basis.

Today’s planning is tomorrow’s peace of mind

A big part of being a parent is making sure your children feel loved, looked after and safe at all times. That’s why you’re considering life insurance. And maybe a will. And probably why you just took the time to read this post. Now that you know what a custodian is, how they work and how to select one, you can go ahead and relax. Just kidding, you have kids under the age of 18. You won’t be relaxing for at least another decade or two.