Estate Planning and Life Insurance

Life insurance is an important part of estate planning. If purchased and owned correctly, it can be very beneficial to those you leave behind.

Generally, there are two primary concerns with naming beneficiaries. First, beneficiary designations can become outdated. Many couples name the other spouse as beneficiary. If the couple separates and the beneficiary designation is not changed, the result can be entirely different from what may be desired.

A second concern with beneficiary designations relates to minor children. Minor children cannot receive insurance proceeds. Therefore, if minor children were named as beneficiaries or contingent beneficiaries someone would have to be appointed to receive the benefits.

Significantly, at age eighteen, the child would be entitled to his or her share of the proceeds. Most parents and grandparents would prefer that an eighteen-year-old child not receive large sums of money without some control or guidance.

Many parents have been made aware of this problem and have therefore named a grandparent or other adult relative as a “substitute” beneficiary. This is not an effective solution.

Although the grandparent could receive the proceeds, if something later happened to the grandparent, the proceeds would be distributed to the grandparent’s heirs.

Another problem with naming as beneficiary a grandparent or other adult relative of the children relates to estate tax. If the grandparent has a large estate, the estate could be subject to estate tax. By naming the grandparent the beneficiary of the life insurance proceeds, the parent has increased an already existing estate tax problem or has now created one.

In almost all cases, a grandparent or other adult relative should not be named the “substitute” beneficiary for minor children. The proper solution is to create a trust either in a will or separate instrument and name the trust as the beneficiary. If a trust is named as beneficiary, the proceeds are paid without significant court involvement, to a trustee designated by the parents. The trustee then administers the proceeds for the benefit of the children in the manner and length of time specified within the terms of the trust.

In conclusion, when selecting a beneficiary for life insurance it is important to give the selection serious thought and to review it when circumstances change.

Jeffery J. McKenna is a local attorney licensed in three states and serving clients in Utah, Nevada, and Arizona. He is a partner at the law firm of Barney, McKenna and Olmstead, with offices in St. George and Mesquite. He is a founding member of the Southern Utah Estate Planning Council. If you have questions or topics that you would like addressed in these Wednesday articles please email him at jmckenna@www.barney-mckenna.com or call 628-1711.