April 20, 2011
Life Insurance Beneficiary Designations
If you want to leave money to a specific person, there’s no better way than with a life insurance plan. While people can challenge a trust and hold up the distribution of funds in court for many years, there’s no way that they can challenge a life insurance beneficiary designation and win. Some have challenged the beneficiary designations but life insurance companies are obligated to pay the person named as beneficiary.
In cases where a divorced couple failed to change life insurance beneficiaries from the previous spouse to a new spouse, everyone knew the deceased would want the new spouse to have the money, but it was never changed. The insurance company can not make judgment calls so in these cases, regardless of what the true wishes were of the deceased, the ex-spouse receives the funds because that was what was on the beneficiary designation. Had the deceased taken a few minutes to fill out another form, his true wishes would have been followed.
Naming children as a beneficiary is quite tricky. Even though it seems simple enough, putting the name of each child can mean you omit someone born after the policy purchase. If you name all children born of the marriage and later divorce and remarry, the policy proceeds won’t go to any children born of that marriage. If you legally adopt a child, they are also not included in that designation. When you name children as beneficiaries, you need to check with the expertise of a local agent for the best wording. If your children are young, naming an insurance trust instead of them is far better. Any money that goes to minors needs to go through the court system if you don’t have a trust. A life insurance trust owns the policy and you can fund it with $1 and the life insurance policy. You then outline the use of the funds in the trust document.
Most of the time, life insurance proceeds go to a spouse, but if the spouse predeceases the insured, then he or she needs to change the beneficiary. Even if you have a secondary beneficiary, it makes the claims process far easier. Some older people want one child in charge of the funds and name them as beneficiary instead of naming all their children. They believe that child will pass the money to their siblings. While the parent may be right, there are two problems. The first is that there is no legal requirement for the adult child to do that. Even if everyone knew the intentions, no court in the world would grant that the beneficiary divide the money.
The second problem is gift tax. If the money per recipient is over the gift tax limit for the year, there is gift tax if the named beneficiary child gives the funds to the others. In order to avoid this, it’s best not to make the estate the recipient. Many states do not have an inheritance tax on life insurance proceed to a named beneficiary. However, if the proceeds go to the estate, there is inheritance tax.
Jim Collier Insurance is an independent insurance agent Michigan agency based right here in the state of Michigan that has been providing expert insurance agent in Michigan advice to Michigan families for over a decade.
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