It’s easy to think Life Insurance and Trusts as two completely different things: one protects your family in case of death, and the other distributes your estate upon your death. Planning ahead is wise when you want to protect your family’s financial future, and it is commendable if you have already established a Trust as well as obtained life insurance. You may have heard that you can or should include life insurance into your plans. But how? Put simply, in most cases you should name your Trust as the beneficiary of your life insurance and here are four reasons why:
1.) Better Control and Management of Your Named Beneficiary. With a trust you have taken the time to create a legal document that is binding and assures your assets will be distributed the way you want. By naming your Trust as beneficiary of your life insurance, you will always have a viable beneficiary to receive the funds. Even if one beneficiary were to pass away, the trust would have already stated the next succeeding beneficiary, together with any special provisions that you want to make for these beneficiaries.
2.) Not having to worry about the settlement of your estate. As time changes so do financial situations. For example, a realistic scenario that has occurred many times over, is when a Trustee needs funds in order to settle the estate but has no resources to do so. It is easy to imagine the added stress this causes grieving family members. Naming your Trust as beneficiary of your life insurance insures that your trustee will have funds to pay your bills, attend to your funeral and final disposition, and manage your estate until it can be distributed.
3.) Protecting beneficiaries who are minors. Too many people name young children as life insurance beneficiaries without considering the consequences. If the children are under 18, a Court supervised Guardianship is required. This is not the best way to provide for the children. Then a child turns 18, the money is turned over without restriction. This is worse. Naming your trust as beneficiary will eliminate court intervention and avoid younger beneficiaries squandering their inheritance. Most Trusts provide for the care, support, maintenance and education of children as needed, with distribution at a later age, such as 25 or 30.
4.) Protection Against Creditors or Unwanted Beneficiaries. If life insurance pays directly to heirs who have financial problems, health or medical issues, or even incarcerated creditors, the government may be able to claim the money. A trust may protect your heirs, and the proceeds of your life insurance, from creditors and the government!
In addition, it’s noteworthy to mention that naming your Trust, a document that you update throughout your life, protects your life insurance from accidentally falling in the lap of an ex-spouse or someone else you would like to avoid.
Warning: there are also sometimes good reasons not to include life insurance in your trust. This involves more complicated estates when life insurance is used to pay estate taxes or fund a business transition. Don’t change the beneficiaries of these kinds of policies, or of policies not actually owned by you, without consulting your attorney!
Do you have questions about your own Life Insurance or Living Trust? Give us a call now for an Estate Plan Review or Consultation.