Estate Planning - Using Insurance With Your Estate Plan

Are you considering purchasing a life insurance policy to benefit your family members after your death? Death benefits from a life insurance policy can be substantial. Benefits can be paid to one or more beneficiaries or to a Trust administered for their benefit.

Did you know life insurance can be a key part of your estate plan? While it’s not a necessary component for everyone, it certainly can be useful in many situations. The tricky part comes with knowing whom to name as the beneficiary of your policy.

If your estate is very simple and you have few beneficiaries for whom you wish to provide, doing beneficiary planning for your life insurance benefits works well. However, if you have a more complicated family situation or you want to provide your beneficiary with asset protection, you may want to consider naming a Trust as the beneficiary of your life insurance policy.

Here are a few examples of why you might want to name a Trust as the beneficiary of your life insurance policy:

1.         Asset Equalization. Not all assets are created equal. If you’ve decided to give one child farmland and the other child pastureland, there is likely to be a discrepancy in property valuation. If your goal is to provide an equal inheritance to each child, life insurance proceeds are an easy way to equalize the value of overall estate distributions. If you name a Trust as the beneficiary, you can stipulate how the life insurance proceeds should be used to equalize any inequities among your beneficiaries.

2.         Debt payment. If you are concerned that your estate will not have enough cash to pay your estate debts, you should consider using a life insurance policy to provide the necessary cash to cover expenses after your death. If done properly, this will prevent your assets from being sold to pay for outstanding debts. By naming a Trust as the death beneficiary, your Trustee will be able to pay the necessary debts, preserve your other assets for your heirs, and distribute any remaining cash pursuant to your wishes.

3.         Beneficiary/Asset protection. Many people can benefit from being a beneficiary of a life insurance policy but not all beneficiaries are responsible enough to receive cash proceeds outright. If your intended beneficiary has a poor track record with money management, handing them a large sum of money outright from the life insurance proceeds probably isn’t in their best interest. However, if you name the Trust as the beneficiary and give specific instructions within the Trust to provide for the welfare of that same beneficiary, your Trustee can more safely provide for the benefit of that beneficiary, without directly allowing them access to the funds. Additionally, Trust planning can provide asset protection for a beneficiary in a difficult marriage who might be heading towards divorce or is facing a lawsuit or bankruptcy. Having your life insurance proceeds pay to a Trust for that beneficiary means those funds should not be available to that beneficiaries’ creditors. Finally, naming a Trust as the beneficiary of your insurance allows for more control and flexibility in planning should your beneficiary die before you or if your beneficiary is a minor child.
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If you think using a Trust to administer life insurance death benefits may be an estate planning strategy you want to explore, please contact Davis & McCann, P. A., Dodge City, KS. We are members of Wealth Counsel, a national consortium of Estate Planning Attorneys and the National Academy of Elder Law Attorneys (NAELA). We focus our practice on providing clients with the best legal advice on Estate Planning, Medicaid and Long-term Care Planning, Family Business/Small Business Succession Planning, Probate, Trust Administration, Real Estate Transactions, and related matters.

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