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The Ins and Outs of Life Insurance Beneficiary Designations
How Life Insurance Beneficiary Designations Play An Important Role In Your Estate Plan Typically, when you think of estate planning, you think of the Last Will & Testament, Durable Power of Attorney, Advance Healthcare Directive, and Living Will. The assumption is that as long as those documents are in place their estate affairs will be in order. What many clients do not realize is that life insurance and other non-probate assets play an important role in their estate plan. A life insurance policy is considered a “non-probate asset” meaning that the proceeds from the policy can be paid directly to the beneficiary outside of the formal probate process. For this reason, it is vital that primary and contingent beneficiary designations always be up-to-date when formulating an estate plan. The mistake that we see most often with our clients is that a beneficiary may be designated, however, a contingent beneficiary is not chosen. For example, a person takes out a life insurance policy in 2007 and lists their son (an only child) as the beneficiary. No contingent beneficiary is listed. In 2009, the son passes away. In their grief, the policy owner does not contact the insurance company to update the beneficiary designations. A number of years later, the policy owner passes away without a living beneficiary on the policy. By default, the estate would become the beneficiary of the policy thereby forcing the proceeds to potentially be subject to inheritance tax in New Jersey or Pennsylvania depending on the relationship between the decedent and the beneficiary. A mistake can cost beneficiary thousands of dollars in taxes if the owner of the policy does not properly designate a beneficiary. A person or entity can be listed as a beneficiary of a life insurance policy. For more complex planning, a trust for the benefit of another person can also be listed as a beneficiary. Every company that offers life insurance has their own beneficiary (or change of beneficiary) form along with very specific ways that these forms must be completed. For example, if you decide to name a trust as the beneficiary of the policy, the trust must be specifically designated on the form. Not designating the trust correctly could result a beneficiary receiving the proceeds of the policy outright which could cause a number of issues. Often times the space provided on the form is not sufficient to include the entire trust designation. In those instances, we prepare a supplement to include all the necessary information. Each carrier has their own mandates for submitting supplements so the process will differ depending on your policy. Ensuring that beneficiary designations are correct and up-to-date with any life insurance policy is a key element of any estate plan. The team at The Murray Firm, LLC will walk you through the process to ensure that your life insurance designations are in-line with your overall estate plan. For more information on estate planning or life insurance beneficiary designations, please call our office at 908-204-3477 or e-mail us at [email protected]. Comments are closed.
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