How to Choose Beneficiaries for Life Insurance Policies
Designating a trust vs. designating individuals
When you create a Revocable Living Trust as part of your foundational estate plan, it will be important for you to update the beneficiaries of your life insurance policies. Whether you'll need to change both the primary and secondary beneficiaries will generally be dependent upon your marital status and net worth. Before you do anything, however, you should consult with your estate planning attorney to determine what will be the best options for you and your beneficiaries. Below are some general considerations for both married and single people.
Updating Beneficiaries if You're Married
If you're married and you don't have an estate tax problem, then you should consider naming your spouse as the primary beneficiary of your policies. This will give your spouse easy access to cash that can be used almost immediately to pay bills. Your contingent beneficiary will then generally be your Revocable Living Trust. Or, consider naming your Revocable Living Trust as the primary beneficiary of your life insurance so that the proceeds will pass into the "B Trust" (or Bypass, Credit Shelter, or Family Trust) created for the benefit of your surviving spouse so that the proceeds will be protected from creditors, lawsuits, and a new spouse
If you're married and you do have a taxable estate, consider naming your Revocable Living Trust as the primary beneficiary of your policies. This will ensure the proper use of your exemption from estate taxes under the AB Trust system. Also, if your trust is named as the primary beneficiary, then you won't need to name a contingent beneficiary since the trust agreement itself will address both your primary and secondary beneficiaries.
Updating Beneficiaries if You're Single
If you're single, then regardless of whether you have an estate tax problem, you should consider naming your revocable living trust as the primary beneficiary of your policies. This will ensure that all of your beneficiaries will be covered. In other words, if one of the primary beneficiaries of your trust predeceases you, then your trust agreement will spell out where that deceased beneficiary's share will go. Also, naming your trust as the primary beneficiary will ensure that a minor beneficiary's share will be handled properly without the need for establishing a guardianship or conservatorship.
Aside from this, if you're single and you do have a taxable estate, then naming your trust as the primary beneficiary will provide readily available cash to pay the tax. Otherwise, if you name individuals as direct beneficiaries, then they will be able to get their hands on the insurance proceeds and spend the money instead of setting it aside to pay the tax. This could create a problem if your estate doesn't have enough other liquid assets to pay the tax.
Establishing an Irrevocable Life Insurance Trust
Regardless of whether you're married or single, if you do have a taxable estate, then you should consider establishing an irrevocable life insurance trust, or ILIT for short, to hold and own your life insurance policies. The ILIT would also be named as the primary beneficiary of the policies that you transfer into it. This will remove the value of the insurance proceeds from your estate and therefore reduce or even eliminate the estate tax that will be owed.
Once you determine who your beneficiaries should be, you'll need to contact your life insurance company in order to update your beneficiary designation form.