Choosing Beneficiaries for Life Insurance Policies

It is crucial that you update your life insurance policy beneficiaries when you decide to build a foundational estate plan and establish a Revocable Living Trust. Updating beneficiaries will largely depend upon your net worth and marital status.

Before you make some amendments, however, you need to see your estate planning counsel to know your best options. Here are some considerations in choosing beneficiaries:

For married people

If you don't have any estate tax problem, choose your spouse as the major beneficiary of your life insurance policies. This will give him or her easy access to cash to pay bills. The contingent beneficiary will then be your Revocable Living Trust. Alternatively, you can name your Revocable Living Trust as the major beneficiary so that the gains will pass into the "B Trust".

If you have a taxable estate, the primary beneficiary should be your Revocable Living Trust. This will ensure that your estate taxes exemption under the AB Trust system is properly used. If your trust is the primary beneficiary, you won't need a contingent beneficiary. This is because the trust agreement will address your major and minor insurance beneficiaries.

For single people

Whether or not you have estate tax problems, it is advisable that the primary beneficiary should be your Revocable Living Trust. Naming your trust as the primary beneficiary will cover all your beneficiaries. This means that if one of your primary trust beneficiaries predeceases you, then the trust agreement will determine where the share of the deceased beneficiary will go.

Another benefit of choosing your trust as the primary beneficiary is that it guarantees proper management of a beneficiary's share without having the need to establish a conservatorship or guardianship.

If you own a taxable estate, then naming your Revocable Living Trust as the major beneficiary will provide immediate cash to pay your tax. There's a risk if you choose individuals as the direct beneficiaries. We all love our family, but often there's one in the crowd who just can't handle money properly, and leaving this beneficiary a huge amount could be a wrong move.

Irrevocable Life Insurance Trust

If you have a taxable estate (it doesn't matter if you're married or not), then create an Irrevocable Life Insurance Trust (ILIT) to own and hold your policies. Naming the ILIT as the primary beneficiary will remove the insurance proceeds' value from your estate. It will therefore reduce or eliminate the estate tax.

Once you identify your beneficiaries, you have to consult with your life insurance company to update the beneficiary designation form.