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Avoiding life insurance pitfalls in estate planning: work with experienced counsel

Life insurance, as some readers may know, can be an excellent tool in estate planning. For instance, life insurance can be used to ensure one’s estate remains solvent by dedicating life insurance proceeds to paying creditors. One can use life insurance proceeds to provide for children from a previous marriage. One can even put a life insurance policy into a trust for children or grandchildren, with various tax benefits.

As useful as life insurance can be in estate planning, though, there are a variety of pitfalls to avoid with this estate planning tool. For one thing, it should be kept in mind that death is not usually predictable and that the beneficiary of a life insurance policy may not be able to manage that money well at the time they receive it. If the beneficiary is a minor, a probate court will assign a fiduciary to manage the money, but putting the insurance policy into a trust can avoid this possibility and allow one to specify the terms of distribution more specifically. 

Failing to update beneficiary designations is another common mistake with life insurance policies. This is particularly important when a life insurance policy is to be paid to a revocable trust. In such cases, an insurance policy will be paid to the trust even if the trust document is updated to change the beneficiary, unless the policy’s beneficiary designation is also updated. Another common mistake with beneficiary designations is that folks may forget to select a contingent beneficiary, which can lead to the policy going to the estate if the primary beneficiary dies before the policy is paid out.

In cases where it does happen that a life insurance policy is paid to the insured’s estate, it can be subjected to the claims of creditors and inheritance tax. In addition, the trust would then go through the probate process, which can lead to additional costs and potential court challenges. Because of these risks, it is important to come up with appropriate strategies and precautions to keep a policy from going to the insured’s estate.

These are only some of the potential pitfalls with life insurance. To cover all possible contingencies, it is important to work with an experienced estate planning attorney to come up with a comprehensive plan.

Source: LifeHealthPRO, “10 common estate planning mistakes (and how to avoid them),” Stephan R. Leimberg, Nov. 7, 2013. 

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