The Moneyist: My ex-husband died and left a $100,000 life-insurance policy to our teenage children. How can I help them invest this windfall?

Dear Quentin,

My ex-husband, and parent to my teenage children, recently passed away. He did not remarry, and his $100,000 life-insurance policy benefits our children.

I would like to set this up to help them establish a nest egg, such as a down payment on a home in the future. I know it’s their money, but I just want to ensure that I do my best for them, especially as I know I have limited control after they are of age.

Both of my kids are in their early teens, and should receive educational benefits from Veterans Affairs. I’m still waiting on confirmation of that, as the VA is not known for timely processing. Any and all suggestions are appreciated.

Mother and Ex-Wife

Dear Mother and Ex-Wife,

I’m sorry to hear that your ex-husband passed away, especially for your children at such a young age. You don’t mention any other assets — such as real estate — so I assume we are dealing with the $100,000 as the lion’s share of their inheritance. Your instincts are admirable, but you won’t be able to access this money on behalf of your children if you are not named as a legal custodian.

Insurance companies don’t pay out money directly to minor children. The payout of these funds will likely be delayed until there is a court-appointed custodian. Ideally, your husband would have named you as a custodian, and arranged to put the money in a trust in the event he died before they came of age.

You can, in the meantime, make plans on paper to help them manage the money when they reach the age of 18 (in most U.S. states, but some state laws say they can only inherit at 21). That would include setting up 529 plans for their college educations when the time comes, and setting money aside for a down payment (or the germ of a down payment).

I recently wrote a story about how to invest $100,000, which gave some idea on the kind of equities to invest in — including companies with a higher return on equity, lower leverage, and more consistent earning profiles. Investing a small portion in the stock market will also help your children become aware of the miracle of compound interest — when you earn money on your initial investment and the money on your investment’s return.

Becoming a custodian of your children’s assets

As for your ex-husband’s insurance policy: “The simplest and most cost-effective option may be for the children’s financial guardian to open a separate account for each child under the relevant Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) to hold the child’s share of the life-insurance proceeds,” says David Goldstein, a trusts and estates partner at Farrell Fritz, a law firm.

You will most likely be required to get permission from your local probate court to serve as custodian of the children’s assets until they reach legal age, says Al Kingan, estate and business planning lead at MassMutual. “The probate court will generally have some discretion regarding what obligations to impose on your custodianship,” he says.

Not only are minor children not legally allowed to own significant financial assets themselves, you may be asked to provide an annual accounting to the court of your use of the children’s funds, he adds. “You may even need to seek the court’s permission regarding investment choices,” Kingan says.

When your children reach the legal age of maturity in your state, they could legally transfer their assets to you as trustee for you to maintain for their benefit until a later date when they will have greater financial and emotional maturity, Kingan adds. “You can discuss with your personal lawyer whether this arrangement would be worthwhile based upon the size of the account,” he says.

You’re starting with the right idea: investing and saving for your children’s future. When minors inherit money, the lessons on what to do with it can sometimes be just as important as the money itself.

A mother wants to know how to access, and manage her children’s $100,000 windfall from their late father’s life-insurance policy.

MarketWatch photo illustration/iStockphoto

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