If you have life insurance, you likely have determined that if you die there is a financial need that must be addressed by your absence. Because of this determination, you pay a small amount each year in premium to the life insurance company for the guarantee that if you die a larger sum of money will be delivered to the named beneficiary.
But who is the best beneficiary?
The most popular choice for beneficiary is the person whom you feel will need the money from the life insurance. This might be your spouse, child or another family member. In many cases this person is NOT the person who should be named the beneficiary. There are some often-overlooked subtleties when naming a beneficiary.
For example, if you name a specific person as beneficiary, then at your death, that person must submit your death certificate to the life insurance company, complete various forms, then collect the insurance funds and deposit them into an account. These steps are fairly straightforward for your spouse, but a common mistake is to name underage children as contingent beneficiaries.
Minor children cannot legally complete the required paperwork and might be too young to even collect the death certificate and open a bank account. If a minor is named as beneficiary in Delaware County, a petition must be submitted to the Delaware County Orphans’ Court to have a guardian appointed to collect the insurance funds and then manage the funds until the child reaches age 18.
A much better course of action is to form a trust to hold the insurance funds for your underage children. This could be an irrevocable life insurance trust, formed during your lifetime, or a dynasty trust, which is formed by the terms of your testamentary trust will. A skilled estate-planning attorney familiar with Delaware County planning can work with you to determine which trust best fits your circumstances.
Even if your beneficiary is an adult, naming a trust for that person as a beneficiary might be the best idea. For example, if you name your spouse as beneficiary of your life insurance and your spouse accepts the life insurance proceeds without a trust, those proceeds are then available to your spouse’s creditors as well as your spouse’s next husband or wife. Instead, if you formed an irrevocable life insurance trust to own the life insurance and at your death the insurance poured into the trust, then the insurance proceeds are sheltered from creditors. Another possibility is that you keep the life insurance in your name and name your spouse as the primary beneficiary, but name “My Estate” as continent beneficiary.
Now you are relying on your spouse to perform some legal and asset protection analysis at your death. If your spouse believes it is safe to have the life insurance in his or her name, then the spouse will accept the life insurance as the primary beneficiary. If your spouse feels it is safer for the life insurance to be sheltered in trust, your spouse will disclaim the life insurance funds, which means the funds go to the contingent beneficiary, which is your estate. In your testamentary trust will you then form a disclaimer trust for your spouse, into which the disclaimed life insurance pours and where it is available for your spouse but sheltered from your spouse’s creditors and future spouses.
So who is the best beneficiary of your life insurance policy? Obviously this will depend on your own circumstances, but be aware that many options do exist. Your best option is to consult with a trusts and estates attorney familiar with the rules applicable to Delaware County who can walk you through the options and clarify their pros and cons.
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