Life Insurance and Estate Planning: Protecting Your Beneficiaries’ Interests
One misconception people have about life insurance is that naming life insurance beneficiaries is all you have to do to ensure the benefits of life insurance will be available for a surviving spouse, children, or other intended beneficiary. Life insurance is an important estate planning tool, but without certain protections in place, there’s no guarantee that your spouse or children will receive the benefit of your purchase of life insurance.
Why Simply Naming Life Insurance Beneficiaries Isn’t Enough
Consider the following examples:
Example 1: Lionel identifies his wife Karen as the beneficiary on a life insurance policy. Karen does receive the death benefit from the insurance policy, but when Karen remarries, she adds her new husband’s name to the bank account where she deposited the death benefit. In so doing, she leaves the death benefit from Lionel’s life insurance to her new husband, rather than to her children as she and Lionel discussed before his death and which is what she indicates in her will.
Example 2: Melissa, a single mother, names her 10-year-old son Kevin as a beneficiary on her life insurance. She passes away when he is twelve. The court names a relative as a guardian or conservator for Kevin until he is of age. By the time, Kevin reaches his 18th birthday, his inheritance has been partially spent down on court costs, attorney’s fees, and guardian or conservator fees. Additionally, it hasn’t kept pace with inflation because of the restrictive investment options available to guardians or conservators. Melissa hoped the life insurance proceeds would be there for Kevin’s college, but the costs and lack of investment flexibility mean there may not be as much as Melissa hoped.
Solution: When Naming Life Insurance Beneficiaries, Use a Trust
In the estate planning process, a common method for passing assets is by placing them in a trust, with a spouse or children as beneficiaries. The same approach may also be used for life insurance policy proceeds. When naming life insurance beneficiaries for the policy, you can designate the trust, so the death benefits flow directly into the trust. Two popular ways to accomplish this:
Revocable Living Trust (RLT) Is the named beneficiary: This option works well for those who have a modest-sized estate or who have already set up a trust. Designating your RLT when naming life insurance beneficiaries simply adds those death benefits to what you already have in trust, payable only to beneficiaries of the trust itself. The benefit of this approach is that it instantly coordinates your life insurance proceeds with the rest of your estate plan.
Set up an Irrevocable Life Insurance Trust (ILIT): For an added layer of protection, an ILIT can both own the life insurance policy and be named as the beneficiary. As The Balance explains, this not only protects the death benefits from potential creditors and predators, but from estate taxes as well.
With the estate tax exemption at $5.49 million per person in 2017 and a potential repeal on the legislative agenda of President Trump and the Republican Congress, you may not need estate tax planning. But everyone who’s purchased life insurance needs to take an extra step to ensure your loved ones’ financial future. To discuss your best options for structuring your life insurance estate plan and naming life insurance beneficiaries, call McDonald Law Firm at (443) 741-1088 to speak with Andre O. McDonald, an experienced Howard County estate planning attorney. He’s here to help!
DISCLAIMER: THE INFORMATION POSTED ON THIS BLOG IS INTENDED FOR EDUCATIONAL PURPOSES ONLY AND IS NOT INTENDED TO CONVEY LEGAL ADVICE.
