There can be confusion regarding naming life insurance beneficiaries and often mistakes can be made. Many of the following mistakes are problems we see on a regular basis with people that come in to meet with us. For example, most people don’t realize that your listed beneficiaries on your life insurance will actually override the beneficiaries you list in your estate plan with regards to that specific asset. This is why we recommend naming the trust as your beneficiary on your life insurance so that the assets can then be distributed according to the dictates of your estate plan – making it easier to update as changes in life occur.
Here are the top 10 mistakes to avoid with your life insurance beneficiary designations:
1. Listing a minor child as your beneficiary
Your child will have to be either 18 or 21, depending upon which state you reside in, in order to receive life insurance proceeds. If the child is under the required age, a legal court proceeding will have to take place to appoint a guardian to manage the funds on the child’s behalf.
2. Causing a dependent to lose their government benefits
If you have a lifelong dependent that relies on government assistance, you put that individual at risk of losing their funding by placing them as a beneficiary. Most of these programs are needs based and require that the individual have less than $2,000 in order to qualify for assistance. By giving them an inheritance, they could lose crucial aid and would have to reapply after they have exhausted the inherited sum. Instead, you can have the assets go to a special needs trust which will enable that individual to still make use of those funds without losing their funding.
3. Not understanding how community-property laws affect your designations
While you can generally name whomever you choose as a beneficiary for your life insurance policy, in community-property states the spouse usually has to choose to waive their rights to the funds. Community property states currently include: Arizona, New Mexico, California, Idaho, Louisiana, Nevada, Texas, Washington, Wisconsin.
4. Avoid potential tax problems that could arise
You may see this and think, “I thought life insurance benefits were tax-free!” Generally you would be correct. In some circumstances there can be gift tax issues – such as when three different people play the roles of owner, insured and beneficiary. For example, if Jane owns a policy on her husband John, and their daughter Suzie is listed as the beneficiary, there could be a gift tax issue if John passes away since it can seem that Jane, as the owner of the policy, is gifting those funds to Suzie. This also can come into play due to community property laws. This can be a very complicated situation and we recommend discussing it with a financial adviser or calling our office for more information.
5. Your trust or will do not supersede the insurance policy designations
As mentioned earlier, the designations listed on your insurance policy will actually override the beneficiaries on your will or trust in regards to the proceeds from the policy. If you have listed your child as a beneficiary on your insurance but have since disinherited that child in your living trust or will, they will still receive the life insurance if you did not update that designation. This is why we recommend naming your trust as the beneficiary on your policies in order to avoid having to update multiple legal documents and to avoid potential difficulties.
6. Make sure to update as needed
Life changes, and it can change often. We recommend reviewing your policy regularly (every 1-2 years) to ensure that it is current. Also, if you know of changes you wish to make, do not delay. This is especially important after a divorce, marriage, death, birth…etc.
7. Pay attention to the details
To help ensure that the proceeds from your life insurance policy are distributed correctly, make certain you are specific. Give detailed information on the beneficiary, such as full name, address and even social security number, so the company can be certain that they give the funds to the right person(s). This will help to avoid confusion, delay and errors.
8. Do not keep it a secret
Make certain that your loved ones know that you have a life insurance policy and that they know where to find it. There are many proceeds that were never claimed simply because family members never knew there was a policy. Don’t let this happen to you! And, while we’re on the subject, make sure they know about your estate planning documents, healthcare documents and any other vital legal documents as well! Being organized with these files will help your loved ones during a time of crisis and loss.
9. Make sure to set conditions as needed
If you have listed young adults to receive your funds, be wary. Many individuals, especially young adults, can be reckless with a large inheritance. Most parents would worry about their 18 year old receiving a large payout and whether they would use the funds responsibly. A way to avoid this is to create a living trust and to set guidelines for the receipt of the money. You can dictate that the funds go in segments, or can even say that certain achievements must be attained to receive portions of the inheritance (such as a college degree, maintaining a steady job, purchasing a home…etc). This helps you to provide control over the assets and help guide your loved ones to make the most of their inheritance.
10. Don’t forget to name additional beneficiaries
Unless you name your trust as your beneficiary, you should have more than one beneficiary listed on your life insurance policy. (Even in your trust you create back-up beneficiaries) If you fail to list a beneficiary, or if the listed beneficiary has passed away, then the proceeds will go into the overall estate and will have to go through probate. Those funds are no longer protected and, because of the probate process, can be used to pay off creditors. Plus, your beneficiaries will now have to face long delays and the high cost of probate. So make certain that you name multiple beneficiaries to ensure that your life insurance policy passes to your loved ones smoothly.
What the Attorneys of Morris Hall Can Do For You:
The attorneys at Morris Hall have 100’s of years of combined experience ensuring that families’ assets are protected from probate, unnecessary taxes, creditors, ex-spouses and Medicaid spend-down. The attorneys also help those in Arizona and New Mexico to apply for and receive Medicaid assistance and Veterans Benefits. Our Arizona offices are located in Phoenix, Mesa, Scottsdale, Cave Creek, Tucson, Prescott, Flagstaff and Arrowhead. Our New Mexico offices are located in Albuquerque, Las Cruces and Santa Fe. Contact us today at 888.222.1328 to schedule an appointment!
This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.