A lot of our estate planning clients at Clarity Legal Group® maintain life insurance as part of their financial planning and their estate planning. The need for insurance changes as your life changes, and so there is no “general” advice about whether you need insurance or how much you need as part of your estate planning. Some of you don’t need any, although everyone would benefit from some. Some of you need a good deal because of the nature of your assets or because of the needs of those you leave behind. There is some advice that is almost always accurate: if you have planned with a Revocable Living Trust the Trust (of the insured) should be the beneficiary of any life insurance.
Paying Proceeds to a Trust
When you purchase a life insurance policy you must name at least one beneficiary. That beneficiary does not have to be a person. It can be a charity, a church, or as I said, a trust. A well designed and drafted Living Trust has considered all of the contingencies which might impact your plan. It starts by directing that your funeral expenses, debts, taxes and the expenses of the administration of your estate be paid from the trust assets. Then it might identify specific bequests to one or more people and define primary beneficiaries for the rest of the assets. It will specify alternative beneficiaries in the event one of your beneficiaries predeceases you and, if well drafted, will provide protections for beneficiaries who are under age, suffering from disability, or any other number of factors which might require a change of course. Your insurance proceeds should be available for each of these steps.
Some of my clients, before we have planned, will have in mind that the insurance go to a family member so funeral expenses and other bills can be paid by that family member. This is actually the opposite of what should happen. If another person is named as the beneficiary and collects the death benefit, that money is now theirs (even if they don’t think of it that way). They should not use their own money to pay the expenses of your estate. The same family member might be the Trustee of the Trust and can use the insurance proceeds as assets of the trust to pay these bills.
The Exceptions to the Rule
Every good rule has some exceptions. Life insurance purchased as part of a business succession plan or Buy-Sell agreement may have a different beneficiary altogether. Likewise, should it be known that the insured is insolvent and will be insolvent at death (meaningly that they literally owe more than they are worth), more thoughtful planning should be applied to ensure that any possible protections of the insurance proceeds are realized. Sometimes insurance is purchased as a part of another trust arrangement such as in Irrevocable Life Insurance Trust or Funeral Trust. In these cases, the insurance proceeds are paid to that trust and not your Living Trust.
Life Insurance, Trusts, and Estate Taxes
One important factor you need to consider when naming a trust as the beneficiary of a life insurance policy is that by doing so the proceeds may be included in your estate for federal and/or state gift and estate tax purposes. If so, you need to be sure that your estate, with the proceeds included, does not exceed the current lifetime exemption amount or your estate will be subject to estate taxes. This is one of the many reasons why you should always consult with an experienced estate planning attorney before making important decisions that could impact your estate plan.
Contact a Chapel Hill Trust Attorney
If you have additional questions or concerns about how life insurance fits into your estate plan or about using life insurance to fund a trust, please contact the Raleigh, Durham, Cary, Chapel Hill area trust attorneys at Clarity Legal Group® by calling us at 919-484-0012 or contact us online.