Estate planning is the preparing of legal documents to carry out your testamentary intent. Estate planning does not just take into account the high net worth individual who is primarily concerned about estate taxes, but rather planning for everyone’s testamentary intent. Testamentary intent is what you want to happen when you die. Notwithstanding, the general definition estate planning can include sophisticated gifting options to reduce one’s taxable estate and avoid or diminish federal and state estate taxes.
I participate in a lot of financial and estate plans, and there is a common distribution technique I never understood. The worst part, is that it almost always unintentional. I think most people would would agree that a child who has lost both of his or her parents should not receive money outright, and as such, his or her inheritance should be held in a trust. The terms of that trust may will vary depending on the age of the parents, age of the children, responsibility of the children, other family dynamics, experiences of the parents, etc., however, most people do not have their largest liquid assets passing pursuant to this testamentary intent.
Your Will only controls those assets that don’t pass by deed, operation of law or beneficiary status. It has been my experience that for young families the largest amount of money to be left to children are their life insurance policies. This makes logical sense as most young families haven’t had the opportunity to create a diversified and liquid balance sheet, however, for pennies on the dollar a term policy could be purchased.
With that being said, how are most policy beneficiary statuses filled out?
- Primary Beneficiary – Spouse
- Contingent – My Children
So depending on the State, your life insurance proceeds will fund either an UTMA Account (usually outright at 21) or UGMA Account (outright at 18). This is a terrible idea. I know 21 year old Evan would have been a terrible person to give a large amount of money to especially when you compound the situation with losing both parents.
If you were thorough enough to create trusts that match your testamentary intent then match your beneficiary statuses accordingly! It is imperative that you check with your insurance professional or attorney as some companies prefer you to just name your estate or to identify the testamentary trust to be created at death.
So What’s the Drawback? Why isn’t Naming a Trust/Estate as Beneficiary Common Place?
The main drawback to naming your estate or testamentary trust as beneficiary is that the life insurance becomes part of your probatable estate. This could increase fees and is likely to increase the time before your heirs receive their check. It should be noted that probate fees are in addition to an estate’s federal or state estate taxes.
What does the beneficiary status of your life insurance look like?