Our “Ask a Question” mailbag addresses naming children as beneficiary.
“Should my life insurance name my children as beneficiary?”
Naming a Child as Beneficiary Exposes the Funds to the Child’s Creditors and Divorce.
Naming your children as beneficiary raises many problems and the loss of a valuable tool.
For example, by naming your child as the beneficiary of your life insurance, your child receives the proceeds outright. This means your child’s social security number attaches to the funds. Further, the asset may become marital property, often placed into joint accounts with a son or daughter-in-law.
These actions expose the money to your child’s creditors and divorce proceedings. Further, these funds will now be part of your child’s taxable estate at death. Another consequence, if your child is a minor, the child cannot collect the life insurance. This might require the appointment of a court-appointed guardian of the estate to gather and hold the funds until your child is 18. Such a guardian will increase the costs, eating up the inheritance.
Protective Trusts, So Much Safety for So Little Effort.
Instead, if you form a trust under your will for your child and name that trust as beneficiary, the trust receives the insurance and not your child. The money is never under your children’s social security number and does not become marital property.
The terms of this trust can include language that allows your child to serve as the trustee at an appropriate age. And, with extensive rights to invest the insurance proceeds as well as use the trust assets for your child and his descendants. But, the trust shelters the insurance proceeds from your child’s creditors, divorce and avoids estate and inheritance taxes at your child’s subsequent death.
Even better, if your child serves as the Trustee, there is no Trustee cost. Your child will serve without fee.
Many Options Exist to Address Your Specific Situation.
In conclusion, these trusts are flexible, inexpensive to create and the terms can be crafted to fit your specific needs. Therefore, the real question is, why would you not use them?
I focus my practice on estate planning. And, I am happy to work with you to review your assets with an eye towards crafting a trust. I am glad to walk you through your options over the phone or in person. Please feel free to Contact our office for a free consultation. Let’s talk!
Wills, Trusts, Probate, and Estate Litigation It’s All We Do!
Peter Klenk, Esq., LL.M.