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Solutions to Common Life Insurance Mistakes

Handshake.jpgPreviously, we talked about common mistakes when naming beneficiaries for your life insurance policy. These mistakes included naming beneficiaries who are minors, incapacitated, receiving government benefits, spendthrifts, or high-risk.

These types of beneficiaries are not prohibited, they just require extra planning. If you have named, or want to name, one of these types of beneficiaries on your life insurance policy, read on to learn about a solution that will allow you to do so while avoiding the problems we highlighted before...

Let's quickly review why these types of beneficiaries create problems.

  • Minors and incapacitated persons cannot own property; therefore, they cannot receive the proceeds. If they are named directly, the life insurance company will make you go to court to get a legal guardian appointed for the beneficiary.
  • Beneficiaries receiving government benefits could be disqualified because the proceeds put their countable assets over the resource limit.
  • Spendthrifts or high-risk beneficiaries could mismanage the proceeds or lose them to creditors or predators.

So how can we ensure these people receive the benefit of the proceeds without directly naming them as beneficiaries?

A solution is to name someone else to receive the proceeds on their behalf. But not just anyone, a trustee under a trust established for the benefit of that beneficiary.

A trust involves three parties: (1) the person who sets the trust up (the Grantor); (2) the person who manages the assets of the trust (the Trustee); and (3) the person for whom the assets are to benefit (the Beneficiary).

The owner of the policy (as the grantor) can establish a trust, naming a trustee to receive and manage the proceeds for the benefit of the intended beneficiary.

Now let's see how a trust avoids problems with the types of beneficiaries identified above:

Minors and Incapacitated Persons

As a competent adult, the Trustee can receive the proceeds without issue. The Trustee can then manage and use the proceeds for the benefit of the minor or incapacitated person according to the instructions left by the Grantor.

Person Receiving Government Benefits

If the proceeds are received by the Trustee under a special needs trust, they will be excluded as a countable asset of the beneficiary and will not affect eligibility for benefits.

Spendthrift/High-Risk Person

In the hands of the Trustee, the beneficiary will not have direct access to the proceeds, so they cannot waste or lose them.

CAUTION: You should always set up a trust by executing a written trust agreement. Do not simply designate a person as beneficiary of the policy with the understanding that they will use the proceeds for the intended beneficiary. This is simple and inexpensive to do, but very risky. Under this informal arrangement, the named beneficiary will be the legal owner of the proceeds and will have no obligation to use the proceeds for the intended beneficiary. The proceeds will also be exposed to the claims of that person's creditors.

If you want to give the proceeds of your life insurance to someone who is a minor, incapacitated, receiving government benefits, or a spendthrift/high-risk beneficiary, you should consult an estate planning attorney about doing so using a trust.

If you are interested in setting up a trust to avoid some of the problems that are discussed above, call us to set up an estate planning consultation.

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Law Offices of Aurelio Leo Lara
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McAllen, TX 78504

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