Wednesday, June 29, 2011

Name your family trust as the beneficiary of your life insurance policy

You purchased a permanent life insurance policy to, among other things, provide for your family upon your passing. You would like that policy to be available to pay off debts, including the balance owed on your home. Perhaps you have even planned for enough of the death benefit to be left over to help out your kids if you were no longer around. In order to do so, you have made your children beneficiaries of the policy. You passed your physical, you qualified for the desired amount, and your agent has assisted you with the beneficiary designations. All the paperwork is complete and you intend to rest easy knowing your family will be provided for.

The missing step here that I point out to my clients is the failure to name a trust as the beneficiary. Should the death benefit be available while your children are young enough to misuse it, the cash is unlikely to be used wisely. I think it's unnecessary to point out real-life examples of the detriment to young adults a cash windfall can cause.

Traditionally, estate planning attorneys will recommend an ILIT (Irrevocable Life Insurance Trust) to own the policy to avoid inclusion in calculating the estate tax. While still an advantageous option, generally they are less desirable today because the estate tax exemption is so high. In most cases, I recommend simply naming the family trust as beneficiary. The trust will hold the cash and the trustee will make distributions for specific purposes and/or at certain ages to preserve the cash and ensure the money is used wisely.

I've met with many life insurance agents. Their job is to match you with the right policy from the wide array of unique options available. They are experts at helping you decide on the right amount and the best way to invest the premiums. When it comes time to name a beneficiary, they can sometimes overlook the critical decision of what will become of the cash upon the death of the insured. When you reach this step, envision how you would like the death benefit to be used. It's almost always the case that a revocable trust can provide the best method for accomplishing that vision.

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