Make sure your life insurance complements rather than complicates your estate plan
Life insurance is a valuable tool to protect your family and possibly your business interests after your death. Your estate plan is a set of legal documents that includes guidelines for what will happen to your assets when you die. Your estate plan could include either a last will and will, or perhaps an inter vivos trust. One of the most common issues I find when reviewing existing planning with clients or potential clients is the inability to coordinate the outcome of a will or trust and the outcome of the proceeds of the life insurance. Let’s look at some of the potential issues this can create so we can avoid them.
First, I regularly find that clients have all of their children named as beneficiaries of their estate through a will or trust if their spouse does not survive them, but their life insurance policy does not list their children as reserve beneficiaries. Or maybe the police only list one of their many children as the beneficiary. This could be done on purpose (perhaps one child is meant to receive all of the life insurance proceeds, but will not receive as much as other children from other estate assets). More often, however, life insurance beneficiaries have been named without any thought or understanding of how the remainder of the estate will be divided. This can cause one or more children to receive a much larger share of the inheritance than the others (which is perfectly fine if that’s your intention, but you don’t want this to happen just because of poor planning) .
A nightmare scenario can occur in a blended family/second marriage situation where life insurance beneficiaries have never been updated after a divorce, death of previous spouse or other changes in life events. life. Whether or not an ex-spouse or ex-stepchildren can collect a life insurance payment after a divorce can be a very complicated legal matter that will depend on several factors. These factors may include the terms of the policy, the state the policy is from, the state the couple lived in, the state the deceased died in, and the terms of the divorce decree. Figuring it all out and fighting it out in probate court can easily cost thousands of dollars. It’s good for the lawyers involved, and bad for everyone else.
Another common issue I see relates specifically to clients who have set up living trusts in order to avoid an estate having to go through probate court after death. This problem arises when spouses have named themselves as the primary beneficiary of a life insurance policy, but have not named anyone as a contingent or “alternate” beneficiary on the policy. When the second death occurs between the spouses (or if the spouses die simultaneously), there is no alternate beneficiary listed to claim the proceeds from the insurance company. In most policies, the insurance company will pay the proceeds of the policy to the “estate of the deceased”. So what’s wrong with that? Well, in this situation, “deceased’s estate” means the deceased policyholder’s probate estate, NOT his or her trust. This means that even though the deceased couple had to bear the cost and effort of setting up a trust to avoid having their estate go through probate, we will still have to go through probate to manage the proceeds of the estate. ‘life insurance.
A final problem that I see too often arises when a will or trust establishes certain rules or limits on the distribution of the inheritance for a beneficiary requiring the beneficiary to reach a specific age or accomplish a certain life goal (usually the education, or perhaps a period of time of sobriety, etc.) before the beneficiary can receive their inheritance directly. The problem here arises when a life insurance policy names that same person as the beneficiary of the life insurance proceeds. This proceeds will be paid directly to that beneficiary without the application of any prior rules established by the policy owner in his or her will or trust (because life insurance proceeds are not subject to the terms of a will or a trust).
The good news is that all of these problems can be avoided with a little good planning. A good estate planning lawyer will do more for you than just type up some legal documents. Planning involves forward thinking, an understanding of the law and a good overview. That’s what I offer when I help a client plan their estate. You should demand nothing less.
My law firm currently offers free electronic, telephone or in-person consultations regarding creating or reviewing estate planning documents and coordinating your planning with life insurance and retirement accounts.
Robert J. Green is an elder, trust, estate and guardianship attorney and the owner of Kootenai Law Group, PLLC in Coeur d’Alene. If you have questions about estate planning, probates, wills, trusts, powers of attorney, guardianships, Medicaid planning, or VA benefit planning, contact Robert at 208-765-6555, [email protected], or visit www.KootenaiLaw.com.
This has been presented as general information and not as legal advice. Do not engage in legal decision-making without the advice of a competent attorney after discussing your particular situation.