Planning for Life Insurance Death Benefits

Baby with money

Something as seemingly simple as designating a beneficiary to life insurance can be fraught with mistakes, like designating a minor as the beneficiary or a person with special needs, both of which require a trust if you wish those benefits to work to their best advantage.

While your beneficiary typically won’t be required to pay income tax on life insurance death benefits that doesn’t mean you should ignore how that money will be distributed—there are options available. The insurance company can cut a check, but if you are not careful, you may end up with the insurer holding on to all or some of the funds in order to distribute them to a minor child when he reaches the age of majority. If the money is held by the insurer, it will continue to earn interest which is taxable and based on today's interest rate is a terrible investment strategy.

The better option is to transfer those funds to a trust that could control the proceeds of the policy based on the stipulations you set when creating it. However, remember that trust planning is not a DYI project.  Take the example of wanting to 'gift' the policy during your lifetime so that it is not subject to Medicaid spenddown.  There are some 'traps' that you could fall into, such as unwittingly maintaining “incidents of ownership” in the policy despite the gift. For example, such “incidents” include borrowing against it, using it as collateral or assigning it in a contract. 

One of the most often overlooked aspects of beneficiary designated funds are the fact that these designation trump you trust or will, in other words, regardless of the terms of your estate plan, life insurance policies, 401K and IRAs go to the named beneficiary. Therefore, when your intentions change, you must contact the life insurance company to update your beneficiary designation.  This is yet another advantage to a fully funded trust; if intentions change only the trust must be amended,  then if all the assets are either owned by the trust or designated to the trust those asset go where, when and how your trust language provides.  It's a thing of beauty!

Are you sure your life insurance policies will work in concert with the rest of your estate plan so that your family will be protected and will be able to avoid unintended and potentially unpleasant financial consequences?  If not, why not call us at 757.259.0707 or request a consultation online; all it will cost you is your time. 

Reference: Forbes (August 30, 2016) “Are Life Insurance Proceeds Subject to Taxes?”


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Update to our Process

The unprecedented coronavirus pandemic has taken our entire country by surprise. We understand how difficult this time is for America’s businesses and families.  However, we believe it is vitally important that we make every effort possible to continue to offer solutions that avoid disrupting our important partnership with you, your family and friends.  As you know, estate planning is not something that should wait for a more convenient time, therefore the opportunity to address your important goals both during and after this crisis should not wait.  To that end, we have added the option of a ‘virtual consultation’ to our office process.  You will now have a choice of either meeting with us in our office or in the comfort of your own home.