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Naming individuals as beneficiaries of your life insurance can produce problems getting your death benefit used as you intended. This article overviews who you should avoid designating as beneficiaries and devices you can use to assure your intentions for those benefits.
*Problems with assigning persons as beneficiary:
You may be married and have a couple of kids; or you're married to a second wife with children of a previous marriage. You assign a beneficiary - your wife - and a contingent beneficiary - your children - with an intended idea of who should get your insurance proceeds and for whom they should be used. Unfortunately, circumstances can easily occur that can undermine your 'intended idea'.
With your wife as beneficiary and the children as contingent, her simultaneous death - or soon after yours - may leave someone other than your choice as guardian of your children. This guardian may make unsuitable use of your insurance proceeds.
Assigning a new wife as beneficiary with your children from a previous marriage as the contingents, opens the possibility that after your death she may break-off all her relationships with, and financial support for, your own children.
Who else should you never designate as beneficiary? Never name a friend as beneficiary with her promise to use your death benefit money for your child. That's because your friend has no legal obligation to use the money for your child. Additionally, if she gets a creditor judgment against her, her creditors may take the money you wanted used for your child; or, if she dies or gets divorced, her husband - not your child - may get the money
Also never name a minor child as beneficiary. That's because a minor child can't receive a death benefits by law. The court - or you through a will - will have to designate a guardian of the child to care for him with your death benefit. That guardian may squander that money. Your child, upon turning eighteen, will get full control over the money. Unfortunately that can wrack havoc in his life at such a young age with a large amount of money - not exactly your intention either.
Of course, you should never name an irresponsible adult as beneficiary. That stands to reason. Any benefits that go to him should be controlled so he won't squander them unnecessarily.
And never name a disabled adult who might receive SSI or Medicaid as a beneficiary. That's because receiving the death benefit from you directly can result in his losing SSI and Medicaid benefits based on his previously impoverished circumstance.
*Use a trust to help you safeguard your intentions for you death benefits:
Naming an asset-protection trust as beneficiary may be a better idea in any case - and certainly for those problem beneficiaries. You can create such a trust in your Last Will and Testament.
If an intended beneficiary is under age 18, disabled or irresponsible. Choose a trustee who'll be legally responsible for managing and spending the funds in the trust for the benefit of the beneficiary.
The trust funds will be protected from the claims of both the trustee's and beneficiaries' creditors. You choose the trust rules to control the purposes for which - and the age or ages at which - the trust's funds are to be distributed to your beneficiary. A well-drafted trust will preserve the beneficiary's eligibility for public assistance benefits like SSI and Medicaid.
For the direct benefit of you minor children, you can always set up a Uniform Gift to Minors Account (UGMA) or a Uniform Transfer to Minors Account (UTMA). Both the UGMA and the UTMA are free to set up. With either a UGMA or a UTMA the insurance company will pay the death proceeds into the account. Your children will have access to the money only when they reach the age of majority. However, most parents wouldn't want their 18 year old child to have access to a lot of money. It's just too easy for them to blow it.
It's probably better to set up a trust as the primary and contingent beneficiary of your life insurance. This way you - as the insured - can choose at what age and what amounts of money will be distributed to both the primary and contingent beneficiaries. This does cost a little but is the better alternative.
You can use a trust as primary beneficiary too. Just make provision in it for your wife either as a shared primary beneficiary of the trust's funds, or set up a trust with insurance proceeds that she can access for herself and can control for specific support of your children.
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