Part 1 of a 2-Part Series
Life insurance is foundational to any estate plan. People usually purchase to protect loved ones. They prevent their spouse, children, or other dependents from suffering financial hardship in the case of unexpected death or incapacity. Naming the person who should receive proceeds from your life insurance policy is not enough. Several other factors come into play.
Naming a Trust as the Beneficiary
While drawing up a life insurance policy, many people designate. This means they name the person who will directly benefit from their life insurance policy. For instance, to provide funds for your spouse’s retirement, name him or her as the primary beneficiary. However, consider the circumstances, goals, and desire to protect the ones you love. To do so, you might consider naming a trust as beneficiary. In certain cases, distributing funds according to established terms helps. This is preferable to having a large cash payment made directly to them.
When to Name a Trust
Minor children
- Life insurance companies will not pay death benefits to children under the age of 18.
- As a result, naming your child as a primary beneficiary but then dying when your child is still a minor, complicates matters.
- For example, a court-appointed guardian, who may or may not be someone you would have chosen, will take charge of managing payouts of insurance proceeds for your child’s benefit.
- The proceeds may not be managed in the way you would have chosen.
- In addition, any remaining proceeds will likely go directly into their pockets when your child becomes a legal adult–whether they are mature enough to handle such a windfall.
- Avoid this by creating a trust with your child named as the primary beneficiary of the life insurance policy.
- Then, the person you name will manage the life insurance proceeds according to your wishes.
- Some people mistakenly designate the child’s caretaker as the primary beneficiary, to avoid appointment of a guardian.
- However, this does not guarantee that funds will actually benefit the child. In fact, proceeds are vulnerable to claims made by the caretaker’s creditors.
Avoid these problems by designating a trust as the primary beneficiary and naming someone you trust as the trustee of that trust.
Recipients of government benefits
- Although you may have good intentions, naming someone to receive need-based government benefits as a primary beneficiary of your life insurance policy may cause them to lose their eligibility for those benefits.
- To avoid this, create a special trust and name the primary beneficiary of your life insurance policy.
- In this way, insurance proceeds will be managed and distributed without compromising government benefits. In fact, it will supplement them.
Spendthrift Beneficiaries
- If you are concerned about a potential lack of financial wisdom on the part of your designee, you may be asking for trouble if you name them as primary beneficiary.
- They could conceivably squander the proceeds.
- Making a trust the primary beneficiary of your life insurance policy and naming the individual as the beneficiary of the trust could establish desired conditions. These would apply to that person. For example, you can indicate that the distributions be made only for health, maintenance, or educational purposes.
Consider Asset Protection
Designating a trust as the direct beneficiary of your life insurance policy may protect its cash value and death benefit from creditors’ claims.
Check back next week, when we conclude this two-part series about the importance of carefully considering beneficiary trust designations.
About Skvarna Law Firm in Glendora and Upland, California
A skilled attorney can assist with your estate plan. Contact us today to learn about your options (909) 608-7671. We operate offices in Glendora and Upland, California. We provide legal services for individuals living in San Bernardino, Los Angeles, Orange and Riverside Counties. This includes the cities of Upland, Ontario, Rancho Cucamonga, Fontana, Colton, Rialto, Chino, Chino Hills, Glendora, Claremont, Montclair, Pomona, La Verne, San Dimas, Azusa, Covina, West Covina, Diamond Bar, Walnut, La Puente, Corona, Norco & Mira Loma. Visit SkvarnaLaw.com to learn more.
