If you make a mistake when naming beneficiaries of your life insurance policies, the people you love the most could end up getting hurt. In this article, we have put together a list of 10 life insurance beneficiary mistakes which you must try to avoid, and how best to fix them:
1. Naming Minor Children
If proceeds of your life insurance are payable to your minor children (instead of to a trust for their benefit), a Judge will decide who controls the proceeds and when your children receive them. What’s more, your children could get access to all of that money at age 18! If you have minor children, create an irrevocable trust to be the owner and beneficiary of your life insurance policies.
2. Naming a Person with Special Needs
By naming an adult or a child with special needs who is or may become eligible for government benefits as a beneficiary, you could unwittingly disqualify them from receiving those benefits. Instead, you should create and name a special needs trust as the beneficiary.
3. Not Considering Community Property and/or Spousal Rights
You don't have to name your spouse as a beneficiary, but if you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), your spouse will need to sign a waiver before you can name someone else as beneficiary. Furthermore, if you name a married adult child as the beneficiary of your policy (without a trust), you could be putting your child's inheritance at risk inadvertently.
4. Ignoring Tax Consequences
While life insurance proceeds are generally income tax-free, they could be subject to the estate tax upon the insured’s death if he or she is also owner. Once again, by creating and naming an irrevocable trust to be the owner and beneficiary, you can provide income and estate tax free distributions of insurance proceeds.
5. Trying to Use Your Will
A properly executed beneficiary designation form always trumps your Will, so don't make the mistake of thinking you can change beneficiaries by naming someone else to receive insurance proceeds through your Will. A Will only controls those assets in your name which do not have any joint owners with rights of survivorship or any named beneficiaries.
6. Failing to Update your Beneficiary Designations
Many people, such as ex-spouses and estranged relatives, are enriched by a life insurance benefit because the insured forgot to update the policy's beneficiary form. Always review your beneficiary designations every time you have a significant life change, or at least every couple of years.
7. Not Being Specific
Over the years, family members may change, and so do names. You should name your insurance beneficiaries in as specific a manner as possible, which means using their legal names, not just a designation such as "my spouse" or "my children."
8. Not Informing Family or Losing Track of Policies
If you have a life insurance policy, tell your family or your attorney about it. Otherwise, it may be overlooked and the benefit never claimed. This is particularly true in the digital age when most transaction are conducted on line with little or no paper trail.
9. Not Considering Individual Circumstances
You can unwittingly create major problems if you leave a large sum of money to someone with a substance abuse problem, someone in a bad marriage, or just someone not equipped to handle money. In these cases, consider establishing a trust that can protect your beneficiaries' inheritance.
10. Naming Only One Beneficiary
If you name only one beneficiary of your insurance policy and that beneficiary dies before you or at the same time, the proceeds of your insurance could go end up being distributed to your heirs as law as directed by State law or a Judge. To prevent this from happening, name successor beneficiaries.
At the Law Offices of Steven M. Adler, PLLC, we can advise you on how to best protect your insurance proceeds from creditors, divorce, and even your own beneficiaries themselves for multiple generations. 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.