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LifeToo many people think that all you have to do with life insurance is name who the beneficiaries are.  However, this basic strategy does not guarantee that your beneficiaries will be able to maximize their benefit from your life insurance.  Think about these examples:

Example 1: Dave names his wife Bethany as his life insurance beneficiary.  After Dave dies, Bethany gets the death benefit.  However, Bethany remarries and puts her new husband on the bank account that has her death benefits in it.  After Bethany dies, her new husband with get what remains of Dave’s death benefits, not Dave’s children, as he would have wanted.

Example 2: Emma is a single mother with a 9-year-old son, Fred.  Emma dies when Fred is just 12.  Fortunately, Emma named Fred the beneficiary of her life insurance.  Unfortunately, because Fred was not yet 21, the county court named a conservator to handle Fred’s inheritance from Emma, including the life insurance.  When Fred turns 21, he gets full control over his inheritance, but that inheritance has decreased because of court costs, attorneys’ fees, and conservator fees.  Additionally, the money has not kept up with inflation because the conservator had legal limitations on possible investments.  All this means that Emma did not leave as much money to Fred as she hoped, and Fred may not be able to afford everything that Emma wanted.

One Solution: Use a Trust as the Beneficiary on Your Life Insurance

When you create an estate plan, placing your assets into a trust can prevent both of these examples.  You name your spouse and children and beneficiaries of the trust and you maintain control over your assets and limit outside influences.  There are two popular trusts that can be an option for you:

Revocable Living Trust (RLT) Is the Named Beneficiary

This is the most common kind of trust.  This works best for couples with modest assets.  If you name this trust as the beneficiary of your life insurance, the insurance proceeds flow into the trust, which then controls how those proceeds are distributed to your loved ones.  This coordinates your life insurance with all the rest of your assets.

Set up an Irrevocable Life Insurance Trust (ILIT)

This kind of trust is most useful for couples who have to worry about estate taxes.  As The Balance explains, having the ILIT own the life insurance and be the beneficiary protects the insurance proceeds from creditor claims and estate taxes.

You may not need to plan for possible estate taxes, but if you have life insurance, you need to incorporate it into your estate plan.  This requires very purposeful planning on your part and comprehensive planning by your estate planning attorney.