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:

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.

…Read the second part of this article…

About Morris Hall:
At Morris Hall, we have focused our legal practice on estate planning for over 40 years.  Along with estate planning, our attorneys help clients and their families with matters of probate, trust administration, wills, power of attorneys, business planning, succession planning, legacy planning, charitable gifting and other important legal aspects.  We also have divisions in financial, real estate and accounting to help you incorporate all of your planning together, ensuring that everything works perfectly for your needs and situation. 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.