Our “Ask a Question” mailbag: Why You Should Not Name Your Child Life Insurance Beneficiary.
“I want to protect my child from a potential divorce. I don’t want my daughter-in-law to end up with my money. So, should my life insurance name my children as beneficiary?”
Naming a Child as Beneficiary Exposes the Funds to the Child’s Creditors and Divorce.
Naming your children as beneficiary raises many problems and the loss of a valuable tool.
For example, by naming your child as the beneficiary of your life insurance, your child receives the proceeds outright. This means your child’s social security number attaches to the funds. Further, the asset may become marital property, often placed into joint accounts with a son or daughter-in-law.
These actions expose the money to your child’s creditors and divorce proceedings. Further, these funds will now be part of your child’s taxable estate at death. Another consequence, if your child is a minor, the child cannot collect the life insurance. This might require the appointment of a court-appointed guardian of the estate to gather and hold the funds until your child is 18. Such a guardian will increase the costs, eating up the inheritance.
Protective Trusts, So Much Safety for So Little Effort.
Instead, if you form a trust under your will for your child and name that trust as beneficiary, the trust receives the insurance and not your child. The money is never under your children’s social security number and does not become marital property.
The terms of this trust can include language that allows your child to serve as the trustee at an appropriate age. And, with extensive rights to invest the insurance proceeds as well as use the trust assets for your child and his descendants. But, the trust shelters the insurance proceeds from your child’s creditors, divorce and avoids estate and inheritance taxes at your child’s subsequent death. One popular version of these trusts are often referred to as Dynasty Trusts.
Even better, if your child serves as the Trustee, there is no Trustee cost. Your child will serve without fee.
Many Options Exist to Address Your Specific Situation.
In conclusion, these trusts are flexible, inexpensive to create and the terms can be crafted to fit your specific needs. Therefore, the real question is, why would you not use them?
See my website for more information about various Irrevocable Trusts.
Why You Should Not Name Your Child Life Insurance Beneficiary:
In conclusion, in this Post, I tried to explain Why You Should Not Name Your Child Life Insurance Beneficiary. So, let me know how I did, comments and questions are welcome!
Furthermore, I would be happy to answer your questions. If you have any other matters for an experienced Estate Planning Attorney about ways to protect your estate, feel free to contact our office for a free consultation. We try to make the process painless!
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Author, Peter Klenk, Esq.