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Does your estate plan account for your life insurance proceeds?

The named beneficiary of a life insurance policy is usually an individual.  Yet there may be special situations where an attorney that focuses on wills and trusts may be needed to structure things differently.

Life insurance proceeds could be made payable to an individual’s probate estate, if he or she desired. There may be even greater benefit in designating a trust as the beneficiary of a life insurance policy.

For example, gift tax on life insurance policy proceeds might be triggered when three different individuals are associated with a single life insurance policy. Typically, only two individuals are involved, as the policy owner is usually also the insured. However, a spouse might take out a policy on the other spouse and name the minor child as the beneficiary. In that scenario, the policy owner might be subject to tax on any policy proceeds in excess of the federal limit.

Naming a trust as the beneficiary of a life insurance policy is one way to avoid the potential triggering of gift tax. Another benefit of titling the proceeds in the trust is the potential protection of assets from creditors. To the extent that the beneficiary of the trust doesn’t have control over the trust principal, as in a spendthrift trust, those assets should be protected.

For a minor child with a disability, a special needs trust might be the wisest option. This type of trust is generally for the purpose of preserving the disabled child’s potential eligibility for government assistance. Under current law, an inheritance of over $2,000 might qualify a disabled child for either Medicaid or Supplemental Security Income benefits.  

Source: LifeHealthPro, “10 ways to screw up when picking life insurance beneficiaries,” Barbara Marquand, Feb. 19, 2015

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