In divorce settings where minor children are involved, it is not unusual for the court to order one or both parents to maintain a life insurance policy providing for the needs of the children through the age of majority (and, in some cases, beyond) in case a parent meets an untimely death. And most people understand this requirement and don’t have a problem complying; however, most people in this situation question whether the life insurance proceeds will be available for use by the other parent and want to avoid that possibility. As a result, they are tempted to name their minor children as direct beneficiaries of the life insurance proceeds. This is not sound practice and should be avoided.
Under Mississippi law, a minor child is not capable of exercising possession or control of life insurance proceeds. Where minor children are listed as direct beneficiaries of life insurance proceeds, and following the death of the insured parent, the life insurance carrier will be required to file a formal guardianship lawsuit so that a judge, and no one else, oversees the receipt, deposit, investment and expenditure of all life insurance proceeds. The guardianship lawsuit would remain active throughout the minority status of the child. Court Guardianships are cumbersome, expensive and fraught with legal limitations.
Some will say that this situation can be avoided by naming a Grandparent or friend as the direct beneficiary instead. However, this does not technically comply with the divorce court’s order which requires that the minor children be protected. Under Mississippi law, a directly named beneficiary under a life insurance policy becomes the legal owner of the insurance proceeds in the event of the death of the insured. There would be no legal prohibition on the beneficiary to spend those proceeds for the benefit of the minor children, and nothing stopping the beneficiary from using the proceeds for personal gain.
The better practice is to create a Last Will and Testament having trust provisions that name a trustee of the life insurance proceeds (and other estate assets as well). The trust language of the Will establishes the responsibility of the trustee to protect the interests of the minor children. Because there is an appointed trustee, there is no need for further court intervention. The actual trust that is created by the Last Will and Testament may be named as the beneficiary of the required life insurance policy. In this way, in the event of death, the life insurance proceeds are “owned” by the trust created by the Last Will and Testament, and the life insurance company is authorized to pay the proceeds over to the trustee named in the Will without the need for further court intervention.
The professionals at Adams & Edens, P.A., are familiar with both Mississippi divorce law and Mississippi estate planning. Let us help you navigate the uncertainty that results when faced with divorce.