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Life Insurance Beneficiary – Trust or No?

Each asset you own has different issues when considering if it should be coordinated with your trust.  In my opinion life insurance is simple and there is one right answer… or at least one most correct answer. In my opinion the primary beneficiary of your life insurance policy should be your revocable trust in most cases.

Let me clarify there are times when your life insurance should not pay to your trust; most notably if there are estate tax issues when a different ownership arrangement has been made and secondly if you want to provide the life insurance to someone other than the beneficiary of your trust.  Putting those issues aside you should probably pay your life insurance to your trust.  Let me tell you why….

Let’s say you want your assets to go to your spouse when you die. You thus tell your attorney it would be easier to just pay it straight to her and, as a back up beneficiary you will name your trust. That’s acceptable but to me not the best. Simply put, what if your spouse is incapacitated?  In that case a conservatorship could be required in order for the life insurance money to be claimed.  Conservatorships, in California, can cost thousands and should be avoided whenever possible. Thus, even when your spouse is the primary beneficiary the trust should be the beneficiary of your life insurance. This assuming your spouse is also the primary beneficiary of your trust of course!

Another big mistake I see is when the life insurance is to benefit a minor. The payment of life insurance proceeds directly to a minor will create the need for a guardian ad litem to be appointed by the probate Court. This will cost thousands! Instead pay that money to your trust and put a clause in your trust to receive the funds and distribute to your minor beneficiaries.

Lastly, a lot of times your trust can create creditor protection for the people you leave the assets to. If the life insurance money gets paid outside of the trust that creditor protection element is most certainly lost.  Thus, it’s important the beneficiary does not “touch” the money but instead gets paid straight to the trust.

Certainly each case needs to be reviewed based on your individual situation but, in my opinion, it is desirable for most people to pay their life insurance to their trust rather than to an individual.

Call me to discuss YOUR case!

-John

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