Preserving Your Legacy: Life Insurance and Estate Planning

Many people mistakenly believe that naming their spouse, child, or loved one as the beneficiary of their life insurance policy is enough to secure the benefits for them in the event of their death.

While life insurance is indeed a crucial tool for financial and estate planning, it’s important to understand that simply designating a beneficiary may not provide the desired level of protection. Without certain safeguards, there is no assurance that the intended beneficiary will ultimately receive and retain the insurance benefits.

When it comes to life insurance, there are factors to consider beyond just choosing a beneficiary. Without proper precautions in place, the benefits could be at risk of being lost or mismanaged. That’s why it’s crucial to explore additional protective measures to ensure your beneficiary receives the full benefit from your insurance policy and that it is used according to your wishes.

To fully safeguard your life insurance benefits, it’s essential to understand the potential pitfalls and take steps to protect your policy’s proceeds. By implementing appropriate strategies and seeking professional guidance, you can secure the intended outcome, providing your loved ones with the financial support you intend even after you’re gone.

Name a Trust as the Beneficiary of Your Life Insurance

A popular way to ensure your loved ones receive money and property as part of your estate plan is by structuring the ownership of assets through a trust. By titling assets in the name of a trust or making the trust the beneficiary of accounts or properties, you can designate your spouse or child as the ultimate recipients. This approach can also be applied to life insurance policy proceeds, providing an additional layer of protection for your beneficiaries.

There are two common methods to achieve this: naming a revocable living trust as the beneficiary or establishing an irrevocable life insurance trust. These options allow you to have control over how your assets are distributed and provide valuable benefits for your loved ones.

Revocable Living Trust

If you have accounts and property that fall below the estate tax exemption or if you’ve already established a trust, considering a revocable living trust as the beneficiary of your life insurance policy can be a smart choice. By doing this, the death benefit from your policy will be added to the assets already held in the trust, and it will be distributed according to the instructions outlined in the trust agreement. The great thing about this option is that it seamlessly aligns your life insurance proceeds with the rest of your estate plan, ensuring everything works together smoothly.

Irrevocable Life Insurance Trust

By establishing an irrevocable life insurance trust, you add an extra layer of protection for your life insurance policy. This trust has the ability to both own the policy and be named as the beneficiary. You have two options to create this trust: either transfer an existing policy into it or have the trust purchase a new policy. To cover the insurance premiums, you can utilize your annual gift tax exclusion by making cash gifts to the trust.

When you pass away, the trust becomes the recipient of the death benefit from the policy. Then, the trustee carries out the instructions specified in the trust document and distributes the funds accordingly. This approach offers an additional advantage of reducing the value of the life insurance policy and the death benefit from your taxable estate. It’s a smart strategy to safeguard your life insurance proceeds and potentially minimize estate taxes.

What’s next?

While the estate tax exemption is currently set at a high level, it’s important to remember that it could change in the future. Given this uncertainty, it’s wise to take proactive measures to safeguard the financial well-being of your loved ones.

If you have already purchased life insurance, it’s worth considering the additional step of structuring your life insurance estate plan. This can provide added security and peace of mind for the future of your family.

To explore the best options available and create a plan tailored to your needs, reach out to us today. Our team is ready to assist you and ensure that your loved ones’ financial futures are protected.

750 F Street, Suite 2
Davis, CA 95616

333 University Ave, Suite 200
Sacramento, CA 95825

3017 Douglas Blvd, Ste 300
Roseville, CA 95616

288 Pearl Street
Monterey, CA 93940

San Antonio
18756 Stone Oak Pkwy, Ste 200
San Antonio, TX 78258

We operate on an appointment-only basis other than our Davis office.

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