Fox Business recently did an article highlighting the 10 ways to mess up your life insurance beneficiaries. We thought this was a great article and wanted to share its guidelines with you in today and tomorrow’s blog postings. Many of these mistakes are problems we see on a regular basis with people that come in to meet with us. There is simply a great deal of misunderstanding when it comes to life insurance beneficiaries. 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:
- 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.
- 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.
- 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, California, Idaho, Louisiana, Nevada, Texas, Washington, Wisconsin.
- 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.
- 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.