The people you love deserve the best you can give them–that’s why it is so important that you not make a careless mistake in naming beneficiaries on your life insurance policy that will further pain them following your passing. Fortunately, as easy as such mistakes are to make, they’re also easy to correct once discovered. Now is a good time to review your beneficiary designations, while you are doing your planning for the new year and getting everything in order for next year.
An article posted by Insure.com recently listed the 10 most common mistakes people make when designating life insurance beneficiaries. As for how they might affect you and how you can fix them, that’s where our years of experience come in.
- Naming minor children. This is easily the most common error I’ve encountered. You want your children or grandchildren to be provided for, but naming them a direct beneficiary of your life insurance policy is extremely risky. Most importantly, the decision on who controls the proceeds and when your child receives them is left entirely up to a judge. And worse yet, the money may or may not actually make it to your kids or grandkids intact without the structure and oversight of a trust and a trustee; and if it does, your kids and grandkids will receive full access to that money on their 18th birthday. How able would you have been to manage a windfall like that at 18?
Though a judge will act on what they think is best, their thinking may not coincide with yours and will certainly lack any deeper understanding of your family. If that sounds to you like a bad idea, don’t worry: a Personal Family Lawyer® like me can provide you the means to see that your children or grandchildren receive all they deserve at a time that’s right.
- Naming a person with special needs. If the direct beneficiary of your policy is an eligible recipient of social services benefits, you risk disqualifying them from those benefits. This can be avoided while still providing them everything they need using a Special Needs Trust. I can help you with that.
- Not considering spousal rights. If you are married, your spouse has certain rights to some portion of your estate – and you can’t disinherit your spouse without their consent. It’s important to know what your spouse’s rights are and consider what distributions of your life insurance proceeds to others may do to your overall estate plan if your spouse decides to take their statutory elective share. Also, designating a married adult child can endanger their inheritance if done without a trust.
- Ignoring tax consequences. Though typically unencumbered by income taxes, the proceeds of your life insurance policy is absolutely subject to the estate tax. There are no few traps for those who don’t take the estate tax into account (see our article on the tragedy of Hollywood legend Lauren Bacall), so come by my office and we will deal with whatever issues you might face. Often, an easy way to take your life insurance out of your taxable estate but make the proceeds available for your family is to set up an Irrevocable Life Insurance Trust (also known as an ILIT).
- Trying to use your Will. Take note: a will never overrides a properly executed beneficiary designation form. Any changes to your beneficiaries must be done in coordination with your insurance policy in order for it to take effect, so don’t make the mistake of relying on a will alone.
- Failing to update. Any significant life change necessitates an update to your estate plan. It’s not uncommon for an estranged ex-spouse to find themselves the unexpected beneficiary of an outdated policy. Even without such a change, it is important to review your policy at least every three years. More may have changed than you thought!
- Not being specific. You would be surprised how many people make the mistake of using ambiguous terms–”my spouse” or “my children”–or even family nick names on their beneficiary forms. Your policy must be as formally-stated as possible to avoid any confusion that could lead to a costly court battle.
- Not informing family or losing track of policies. Your insurer is not going to go out of their way to locate and alert your beneficiaries of the money they stand to gain. Make sure to leave documents that indicate what life insurance policy you hold and how your beneficiaries can go about making claim to them. Our office makes use of a regularly-updated Family Wealth Inventory to track the assets of our clients and prevent anything from slipping through the cracks.
- Not considering individual circumstances. Should your intended beneficiary for any reason not be in a position to handle the money with care–be it anything from a troubled spousal relationship to a substance abuse problem–you will want to make sure that your beneficiary benefits from the inheritance. A trust can be established to provide for your beneficiary while protecting the assets from bankruptcy, creditors and divorce, for multiple generations.
- Naming only one beneficiary. In the event that the sole beneficiary of your policy dies before you or at the same time, the entire proceeds of your insurance will be directed by state law, often decided by a judge after a dispute. Naming secondary or even tertiary beneficiaries can guard against this.
If you would like to learn more about protecting the inheritance you’ll leave behind, call our office today to schedule a time for us to sit down and talk. Call us today at 612-206-3701 or leave us a message via our contact form and mention this article.
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