Naming Beneficiaries - Life Insurance And Estate Planning

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, using a life insurance policy beneficiary form to name your beneficiaries may be a good option. Life insurance beneficiary forms typically only allow for 1-2 alternate beneficiaries to be named, should your first beneficiary predecease you in death. These forms do not allow you to have a say in how or when the distributions will be made after your death.  If you have a more complicated family situation, 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:
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1. Asset Equalization. Not all assets are created equal. If you’ve decided to give one child producing farm land and the other child pasture land, there is likely to be a discrepancy in property valuation. If your goal is to provide an equal inheritance to each child, you can use life insurance proceeds 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 beneficiaries, and how any excess should then be distributed. Life insurance beneficiary forms do not allow for such instructions.

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2. Debt payment. If you are concerned that your estate will not have enough cash to pay your estate debts, you may want to 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 your 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. If you use a life insurance beneficiary form and name one or more individuals as the beneficiary of the life insurance policy, they are under no legal obligation to pay for your estate debts and therefore, your other assets may still need to be sold to pay outstanding claims. 

3. Beneficiary protection. Most people can benefit from being a beneficiary of a life insurance policy but not all beneficiaries are ready to receive the cash proceeds outright. If your intended beneficiary has a poor track record with money management, handing them a large sum of money outright from life insurance proceeds probably isn’t in their best interest. However, if you name a Trust as beneficiary and give specific instructions within the Trust to provide for the welfare of that same beneficiary, your Trustee can provide for the benefit of the beneficiary without directly allowing them or their creditors access to the funds. This also might be an important consideration if your child is in a difficult marriage, being sued or going through a bankruptcy. Your Trustee will control the life insurance proceeds and therefore, those funds would not be available to the beneficiaries’ creditors.

Naming a trust as a death beneficiary on a life insurance policy offers advantages not afforded by the forms provided by the life insurance company. By naming a trust as the beneficiary, you are allowed more flexibility in planning for your beneficiaries. 

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.