NEWS

Life insurance can be a powerful financial and estate planning tool, but its benefits can be reduced or even eliminated if you designate the wrong beneficiary or fail to change beneficiaries when your circumstances change.

Common pitfalls to avoid include:

1. Naming your estate as beneficiary. Doing so can subject life insurance proceeds to unnecessary state inheritance taxes (in many states), expose the proceeds to your estate’s creditors and ensure that the proceeds will go through probate, which may delay payment to your loved ones.
2. Naming minor children as beneficiaries. Insurance companies won’t pay life insurance proceeds directly to minors, which means a court-appointed guardian (who, if you’re divorced, could be your former spouse) will manage the funds until your minor-age children reach the age of majority. A better approach is to designate a trust as beneficiary. This allows you to determine who will manage the funds and how they’ll be distributed to your children.
3. Naming your former spouse as beneficiary. It’s unlikely that you’d do this intentionally. But if you get divorced and neglect to designate a new beneficiary, this could be the result (even if you’ve updated your will or trust).

For many people, an effective strategy is to establish an irrevocable life insurance trust (ILIT) to purchase and own a life insurance policy and to designate the ILIT as the policy’s beneficiary.

If you’re unsure of whom to name as beneficiary of your life insurance policy or retirement plan or would like to learn about more ways to provide for your minor children, please contact us.

© 2019

If you’re divorcing, it’s important to review your estate plan as early as possible, for two reasons: First, you may wish to revise your plan immediately to prevent your spouse from inheriting or gaining control over your assets if you die or become incapacitated before the divorce is final. Second, although a divorce judgment or settlement automatically extinguishes certain of your former spouse’s rights, some documents must be modified to ensure that he or she doesn’t receive unintended benefits.

Consider revising your will and any revocable trusts to exclude your spouse. Note that, in many states, your spouse will retain elective share or community property rights to a portion of your estate until the marriage ends.

But revising your will or trust will limit your spouse to the legal minimum if you die before the divorce is final. If you have irrevocable trusts, determine whether they provide for your spouse’s interest to terminate automatically upon divorce.

Other actions to consider include:

• Changing beneficiary designations in IRAs, life insurance policies, annuities or retirement plans (note that federal law prevents you from removing your spouse as beneficiary of a retirement plan, without his or her consent, until the divorce is final),
• Revising payable on death (POD) or transfer on death (TOD) designations in bank or brokerage accounts,
• Revoking powers of attorney or health care directives naming your spouse as agent, and
• Establishing trusts for your minor children. (If they inherit assets from you outright, a court will likely appoint your former spouse as conservator.)

Finally, bear in mind that, under the Tax Cuts and Jobs Act, any alimony paid is no longer deductible by the payer or taxable to the payee.

In light of this major life event, don’t hesitate to turn to us. We can review your estate plan and recommend any revisions necessary because of the divorce.

© 2019