Article by Larell Baldwin
There seems to be a prevailing confusion over how to treat the designation of beneficiaries of a life policy where a Revocable Living Trust is in place. The main consideration of avoiding Probate can be achieved in either case whether beneficiaries of the life policy are named in the life policy or the Trust becomes the sole beneficiary of the life policy. But there are other issues to be considered in determining the best choice for a client’s estate planning needs.
If the client has, a single beneficiary for their estate, such as an only child, for example; naming that child in the insurance policy as the sole beneficiary would be sufficient. But when there is more than one beneficiary, the opportunity to work with different distribution scenarios is lost because the insurance company sends a settlement check to each beneficiary for their designated beneficial share. End of story.
When to name a Revocable Living Trust As A Beneficiary Of A Life Insurance Policy
Consider, if the client has a special needs child, or adverse family circumstances such as a beneficiary that is abusing drugs or alcohol, or a poor relationship with the spouse of an adult child, or a scenario for distribution, over time, of the child’s inheritance such as college or vocational expenses. There may even be a desire to hold assets in the trust for distribution at some future time that may be years away. The insurance company will not accommodate these special circumstances. A special needs child who is receiving public assistance benefits cannot receive an inheritance and maintain those benefits, so the Revocable Trust is an ideal way of including that child as an heir but holding their inheritance in Trust to be managed by a designated trustee for their benefit. It may even be a situation where financial assistance is necessary for the entire lifetime of a beneficiary. This can be achieved by holding funds for that purpose in Trust under the administration of a designated trustee. A Revocable Living Trust can exist and function for 25 years plus the life of the last living beneficiary. It is ideal for managing estate assets over an extended time under various scenarios, and it is an amendable document, so if circumstances change, the Trust can be amended to suit the circumstances. Neither a life insurance policy nor a Will can achieve this kind of flexibility. A Will can be changed of course, but it would have to be recreated from scratch each time there is a change.
Let me conclude by mentioning that an Irrevocable Trust is quite a different situation. It is created for only one purpose and that purpose is cast in stone. It cannot be changed until that time or situation is achieved. The creator of an irrevocable trust has no control over the trust. They cannot touch the assets in the trust and they cannot cancel the trust. It must be administered by an arms-length Trustee that has no relationship to its creator and no benefit from the Trust. In my estimation, this type of trust is undesirable in most estate planning situations. Its purpose is to secure funds in a way that cannot be reversed, changed or cancelled…such as providing funds for educational purposes or a child or grandchild, or the care of a disabled child.
Naming a Trust as the beneficiary of a life insurance policy or annuity is a very effective way of building flexibility into one’s estate settlement planning. The insurance company pays the death benefit to the Trust and the Trust dictates the scenario by which the distributions are made.
Contact a Heritage living trust specialist today to find out how you can set up a living trust.
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