Selecting a beneficiary for your life insurance policy sounds pretty straightforward. You’re just deciding who will receive the policy’s proceeds when you die, right?
But as with most things in life, it’s a bit more complicated than that. It can help to keep in mind that naming someone as your life insurance beneficiary really has nothing to do with you: It should be based on how the funds will affect the beneficiary’s life once you’re no longer here.
It’s very likely that if you’ve purchased life insurance, you did so to make someone’s life better or easier in some way in the wake of your death. But unless you consider all of the unique circumstances involved with your choice, you might actually end up creating additional problems for the people you love.
Given the potential complexities involved, here are a few important questions you should ask yourself when choosing your life insurance beneficiary:
1. What are you intending to accomplish?
The first thing to consider is the “real” reason you’re buying life insurance. On the surface, the reason may simply be because it’s the responsible thing for adults to do. But we recommend you dig deeper to discover what you ultimately intend to accomplish with your life insurance.
Are you married and looking to replace your income for your spouse and kids after death? Are you single without kids and just trying to cover the costs of your funeral? Are you leaving behind money for your grandkids’ college fund? Are you intending to make sure your business continues after you’re gone? Or perhaps your life insurance is in place to cover a future estate-tax burden?
The real reason you’re investing in life insurance is something only you can answer. The answer is critical, because it is what determines how much and what kind of life insurance you should have in the first place. And by first clearly understanding what you’re actually intending to accomplish with the policy, you’ll be in a much better position to make your ultimate decision—who to select as beneficiary.
2. What are your beneficiary options?
Your insurance company will ask you to name a primary beneficiary—your top choice to get the insurance money at the time of your death. If you fail to name a beneficiary, the insurance company will distribute the proceeds to your estate upon your death. If your estate is the beneficiary of your life insurance, that means a probate court judge will direct where your insurance money goes at the completion of the probate process.
And this process can tie your life insurance proceeds up in court for months or even years. To keep this from happening to your loved ones, be sure to name—at the very least—one primary beneficiary.
In case your primary beneficiary dies before you, you should also name at least one contingent (alternate) beneficiary. For maximum protection, you should probably name more than one contingent beneficiary in case both your primary and secondary choices have died before you. Yet, even these seemingly straightforward choices are often more complicated than they appear due to the options available.
For example, you can name multiple primary beneficiaries, like your children, and have the proceeds divided among them in whatever way you wish. What’s more, the beneficiary doesn’t necessarily have to be a person. You can name a charity, nonprofit, or business as the primary (or contingent) beneficiary.
It’s important to note that if you name a minor child as a primary or contingent beneficiary (and he or she ends up receiving the policy proceeds), a legal guardian must be appointed to manage the funds until the child comes of age. This can lead to numerous complications (which we’ll discuss in detail next week in Part Two), so you should definitely consult with an experienced Family Law attorney like us if you’re considering this option.
When selecting your beneficiaries, you should ultimately base your decision on which person(s) or organization(s) you think would most benefit from the money. In general, you can designate one or more of the following examples as beneficiaries:
3. Does your state have community-property laws?
If you’re married, you’ll likely choose your spouse as the primary beneficiary. But unless you live in a state with community-property laws, you can technically choose anyone: a close friend, your favorite charity, or simply the person you think needs the money most.
That said, if you do live in a community-property state, your spouse is entitled to the policy proceeds and will have to sign a form waiving his or her rights to the insurance money if you want to name someone else as beneficiary. Currently, community-property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
Tomorrow, I'll continue with Part Two in this series discussing the remaining three questions to consider when naming beneficiaries for your life insurance policy.
Trusts vary in their structure, funding, and terms, so it’s hard to know how divorce will impact your trust without review. It’s safe to say, without question, your trust (and really your entire estate plan) should be reviewed during your divorce to prevent unforeseen negative outcomes.
The impact of a divorce on your trust can depend on:
The Trust’s Structure
Trusts frequently name the spouse as a trustee and beneficiary. In divorce, clarify your wishes in regards to these provisions. Even if you want to keep each other in your financial plans going forward, the trust should be amended appropriately after your divorce is complete, so your intention is clear.
Whether It’s Revocable or Irrevocable
If it’s revocable, changing the terms of the trust is easy, but you may have to wait until after your divorce is final to do it due to “orders” that go into effect when you file for divorce that prevent you from moving assets. If your trust is irrevocable, it might be necessary to petition the court to change the trustees, and the trust assets themselves may or may not be part of the divorce judgment.
Your State’s Laws on Community Property
Divorcing parties sometimes attempt to shield assets in trusts to keep them out of the pockets of the soon to be ex. When done surreptitiously, this could significantly complicate the divorce. Even when the assets in a trust are separate property, the income from the trust might still be considered for child support and alimony purposes.
Trusts can be affected by divorce, so you should take steps to protect your trust and your intentions. If you are ready to take that step, meet with us for guidance.
As your Personal Family Lawyer®, we can help you navigate your divorce so your assets, including those held in trusts, remain under your direction and control. Our Family Wealth Planning Session guides you to protect and preserve what matters most. Before the session, we’ll send you a Family Wealth Inventory and Assessment to complete that will get you thinking about what you own, what’s most important to you, and what you can do to ensure your family is taken care of.
In order for your Texas will to be valid, it must have at least the following four elements:
1) The identity of the person making the will
2) The document offered as a will must have been made with "testamentary intent," meaning that the person wanted to make a revocable disposition of his or her property at death.
3) The person making the will must have had "testamentary capacity," meaning he/she was over 18 and of sound mind.
4) All statutory formalities must be observed. As of this time, these include three main requirements from Ch. 251 of the Estates Code:
a) Will must be signed by testator OR by another person at his/her direction and in his/her presence
b) Will must be attested by two or more credible witnesses 14 yrs of age or older, who subscribe their names to the will
c) These witnesses MUST sign in the presence of the testator
There are pages upon pages of case law further clarifying what all of these requirements mean, but in general a few interesting things to note are:
1) The identity requirement does not have to be satisfied by a notation at the beginning of the will such as "Last Will and Testament of Joe Schmo." The testator's signature is enough to meet this standard, though of course this is not best practice and is only typically seen in extreme cases. The signature/identity also need not be at the end of the document.
2) While the best practice and certainly most common scenario for showing testamentary intent is that the document being offered as a will is, in fact, labeled as a will and is in the generally recognized form of a will, it is possible to show testamentary intent even if the document doesn't call itself a will. Such as a note that says "I want my daughter to get my house when I die. Signed, Joe Schmo." HOWEVER, note that it is clear from case law that letters or notes directing (for example an attorney) to prepare a will or codicil, do NOT meet the testamentary intent standard and cannot be offered for probate in lieu of a will.
3) If you have concerns about testamentary capacity, you truly and sincerely need to obtain professional legal help to assure that there are not questions later about the execution of your documents. A separate post on this blog gives more detail on the basic contours of this standard, but if there are questions, professional help is needed. Also of interest, persons under 18 have testamentary capacity if they are 1) married or 2) in the armed services.
4) While the will does not technically have to be signed by the testator with the witnesses watching, the witnesses must be in the presence of the testator when they sign. In practice, the best course of action is always to have all witnesses and testator remain together in the room observing each other signing all of the documents.
The general differences between a will and an estate plan are:
A will can: 1) direct how some or all of your property is passed at your death (to a greater or lesser degree of complexity), direct what happens to you at your death (but may not be seen until too late), and 3) if you have dependents it can name their guardian(s), including a guardian of their property.
While a will is important, it is limited in the following ways: 1) it can only go into effect if you are deceased, if you are incapacitated your non-spouse family has no guidance and often no ability to manage your funds or make your medical decisions 2) while a will can state your wishes for your body, last services, etc..., it is not always followed because a will is not always found and read immediately after death when these decisions are being made. In addition, if family disagrees, there can be disputes as to who has the right to make such decisions, 3) it will typically only govern the disposition of SOME of your property and the types of property not controlled are often among the most valuable (retirement accounts, life insurance, property owned by joint tenancy, and other assets with beneficiary designations will pass according to those designations and NOT according to your will), 4) without adding a trust to the will, money left for children can only be handled in specific, usually statutorially controlled ways, typically involving court supervision, 5) if you are only incapacitated there is no guardian designated for the children, the will is not in effect, and 6) children or family members with special needs and/or on government assistance may loose their benefits if they receive an inheritance from you via the courts that was not structured to avoid disqualifying them.
An estate plan can: 1) direct how ALL of your property is passed at your death, 2) direct what happens to you at death without requirement that will be found and read first, 3) if you have children it can name their guardians and by including trusts can provide a great degree of control over how money left for them is managed and spent WITHOUT court supervision, and 4) by using additional documents it can control what happens if you are incapacitated as well as if you are deceased and can protect funds for your loved ones in either event.
As you can see, while a will is a very important PIECE of an estate plan, doing "just a basic will" as many people are wont to do, leaves a lot of large gaps in coverage!
The good news is, the additional documents that are needed to fill in these gaps don't have to be crushingly expensive or hard to obtain. The term "estate planning" can sound intense, but a competent attorney can lead you through all of these decisions and documents in a way that makes sense for the size of estate you have and the people you need to protect. Contrary to popular beliefe "estate planning" doesn't refer only to complicated and expensive actions taken by high-asset families to protect and pass on great wealth. It refers to a big-picture plan that is available to the average individual and family too!
Jessica A. Brown, attorney