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Why Your Trust Should Always be the Beneficiary of Your Life Insurance

If you’ve ever contemplated establishing a Revocable Living Trust as part of your Comprehensive Estate Plan you probably considered avoiding probate as one of the principal benefits. While it is true that, properly structured and funded, living trusts do indeed avoid probate there are many more important reasons to make it the centerpiece of your dispositive plan.

In fact, avoidance of probate, especially with life insurance, seems like a belt and suspenders approach at best and a completely unnecessary complication. Anyway, we’ve all been taught that assets that pass by beneficiary designation don’t go through probate, right? Well, more about that later. For now, let’s focus on the top reasons your Trust should always be the beneficiary of your life insurance.

1. Protecting the Inheritance for Certain Beneficiaries
One of the most important yet least discussed reasons for making the Trust the beneficiary of life insurance, is that in many cases the intended beneficiaries are simply unable to handle the inheritance. When most of us think about planning our estate we intend to give our property to our husband or wife and our children.

Surviving Spouse as Beneficiary:
Naming a spouse is a common practice. However, if your spouse is or becomes unable to handle financial matters, or you and your spouse divorce, then you will need to review your beneficiary designation to make sure that it is still appropriate. More about whether this is ever a good idea later.

Minor Children as Beneficiary:
While you may name your minor children as your designated beneficiary, we will be unable to pay the life insurance proceeds to your children until the earlier of:

• The date that your children reach the age of majority (usually age 18 or 21, depending on applicable state law).

• The date that a legal guardian of the minors’ estate has been appointed by a court. This appointment process can be costly, and state laws may limit who may be named a guardian of an estate. Generally, a guardian of the minors’ estate will hold the money for their’ benefit until they reach the age of majority, usually age 18 or 21, depending on state law.

We all cringe when we hear stories about the 18-year-old that receives a large sum of money, immediately heads out to buy a new expensive car and goes on a two-month party binge with a dozen of his closest friends.

But it’s not just the newly minted adults that lack the skills to properly handle large sums of money. Some may just be spendthrifts that have never been financially responsible. Others may be in a less than rock solid marriage or going through bankruptcy at the time the insured departs this mortal plane. Unfortunately, the grieving widow is often prayed upon by less than honorable suitors leaving her and the insured’s children high and dry after the money’s all been spent. Then there are those who have special needs or are currently receiving some form of government benefits that would be disqualified by receipt of an outright inheritance.

Perhaps an example here would provide some clarity.

Let’s imagine a scenario where a husband and wife are in a car accident in which the husband is killed and the driver of the other car is seriously injured. Further assume that the wife was at fault and the other driver sues and receives an award of $500,000 in excess of the auto insurance policy liability limits of the husband and wife. If the couple had a $500,000 life insurance policy on the husband to provide for his wife’s and their children’s living expenses with the wife as the primary beneficiary, all those funds would be immediately available to satisfy the wife’s judgment creditor potentially leaving the family penniless.

Or consider this fact pattern. Let’s assume you have an only child, a 19-year-old daughter who is a sophomore in college. Both husband and wife die. If you are like the vast majority, you’ll want your daughter to receive all your property. But the question is, is it wise to sell everything and write her a check for let’s say $750,000.

Wouldn’t it be prudent to create a trust for her benefit, properly structured to ensure that her educational expenses would be taken care of along with her general living expenses and any other items that you specify in the Trust. The Trustee which could be a trusted friend, family member, attorney, CPA, local bank, financial adviser or some combination, who would manage and invest the trust.

The Trustee would hold the funds for your daughter’s benefit until she reached a more mature age say 25 at which time all or a portion of the inheritance would be made available for withdrawal. It may be your desire to permit a series of withdrawals available at various ages, for example 1/3 at age 25, 1/3 at age 30 and the remainder at age 35.

Dependent upon your personal financial philosophy you may even determine that it is best to keep the property in trust for her lifetime while providing the flexibility for the trustee to purchase property to be used by her as a family home, and living expenses or even investing in a business, providing for lifetime asset protection for your daughter against future creditors or the claims of a divorcing spouse.

Trusts have been used to protect property this way for hundreds of years. Asset Protection is arguably the primary reason to establish and utilize one today.

2. Stuff Happens
Unfortunately, life doesn’t typically bend itself to your planning. People don’t always die in the order that we expect and when that happens the typical primary beneficiary, contingent beneficiary designations that many advisors recommend simply don’t work.

For an example consider the following fact pattern. John Doe has a $1,000,000 life policy with his wife, Mary Doe as the primary beneficiary and his 3 children as contingent beneficiaries who are to receive 1/3 each. The oldest son Matt, age 25, is killed in an automobile accident along with his mother Mary Doe. He leaves a wife and two children ages 2 years and 9 months and is survived by his younger brother Tim and sister Ruth ages 21 and 17 respectively.

John dies 1 year later but never thought to change the beneficiary designations on his life insurance. What happens? Stuff happens! and it is probably stuff that John, had he thought about it, wouldn’t have wanted.

Tim receives a check for $500,000 immediately.

Ruth’s $500,000 is held in a guardianship account for a year until she reaches age 18 at which time she receives a check for $500,000 plus earnings outright.

Matt’s widow receives nothing!

3. Blended Families
“Modern Family” is a TV show that is typical of many blended families today. Jay has two grown children and four grandchildren. Jay and his second wife Gloria have a son together and Gloria has a son from a previous marriage. Oh, and did I mention that his new wife is close in age to his children.

Once you have been through a divorce you understand that “till death do us part” may not be how the story ends. You want to take care of your spouse, children, and grand-kids but leaving it to them to work it out or counting on your spouse to be fair, is both unfair to the surviving spouse and potentially a recipe for disaster.

The biggest issue for blended families is that your spouse may, over the years, decide not to leave anything to your children from a previous marriage.

Additionally, in the case with a much younger new spouse, it’s quite possible that he/she could live for as long or longer than their age contemporary step-children. Life insurance proceeds left in a well thought out trust can avoid the very real conflict that could easily, and probably will, ensue with a simple beneficiary designation dispositive plan.

4. Probate

The Estate as Beneficiary
If life insurance proceeds are payable to the decedent’s estate, the beneficiaries of the estate won’t receive the proceeds until a legal process called “probate” is completed. By naming a beneficiary other than the estate, the life insurance proceeds can be paid to a designated beneficiary almost immediately after a claim for life insurance benefits has been filed and without having to go through the probate process.

In addition, naming the estate as the beneficiary of life insurance proceeds may subject them to the claims of the decedent’s “creditors” (i.e. people and institutions to whom they owe money). This means there may be less money to distribute to the heirs under the Will.

Life insurance proceeds payable to a designated beneficiary other than the decedent’s estate will generally not be subject to the claims of his/her creditors.

Estate Planning 101 teaches us about the various ways property passes upon death. Probate is typically not necessary if property is passed by operation of law, i.e. joint ownership of property with rights of survivorship. Probate is also not required if property is passed by beneficiary designation. Life insurance, qualified plan proceeds, annuities, Pay on Death or Transfer on Death accounts are a few examples. These are all typically seen and often used in implementing a dispositive plan for a decedent.

However, all these methods of property transfer on death have one thing in common – they are all unrestricted outright transfers. At the moment of death, all rights in the property are vested in the beneficiary or the joint tenant and likewise subject to the recipient’s creditor’s claims or to the whims of a spendthrift beneficiary.

They are also potentially subject to probate! Unless the recipient of the life insurance proceeds take affirmative steps to do their own planning the proceeds will be subject to probate on their subsequent death. While there are certainly actions that can be taken to avoid the subsequent probate, payment of the life insurance proceeds into a trust would have made those actions unnecessary.

5. Estate Taxes
Federal estate taxes must be paid if the net value of an estate at death is more than the amount exempt at that time. Currently the federal exemption is $11,180,000, adjusted annually for inflation. Some states also have their own estate or inheritance tax, so it is possible that the estate could be exempt from federal tax but have to pay a state tax.

If the estate will not have to pay estate taxes, naming a living revocable trust as beneficiary of the policies will give the trustee control over the proceeds. It also ensures that the court will not be able to control the proceeds if a beneficiary is a minor, incapacitated or no longer living when the insured dies.

If the estate will be subject to estate taxes, it would be better to set up an irrevocable life insurance trust and have the trust own the policies. This will exclude the value of the insurance from the decedent’s estate, resulting in reducing the size of the estate and any estate taxes owed so more can be left to the beneficiaries.

Consider the restrictions on transferring existing policies to an irrevocable life insurance trust. Should the owner die within three years of the transfer date, the IRS will treat the transfer as one made in contemplation of death and the value of the insurance will be included in the estate for purposes of calculating the estate tax. There may also be a gift tax. These restrictions, however, do not apply to new policies purchased by the trustee of this trust.

6. Inheritance Taxes
As the saying goes: The exception makes the rule. At this writing (2018) there are still six states the impose an inheritance tax.
New Jersey

It is possible that life insurance proceeds paid to a trust may not qualify for the inheritance tax exemption provided by some states for insurance payable to a named beneficiary. Check with your tax adviser, run the numbers and then weigh the many advantages of naming the Trust as beneficiary of the life insurance policy against the potential tax hit.

7. What About Community Property States
If you live in a community property state – (Arizona, California, Idaho, Nevada, New Mexico, Texas, Washington or Wisconsin) your spouse may have a legal claim for a portion of the life insurance benefit under state law. If you name someone other than your spouse as beneficiary, payment of the life insurance benefit may be delayed until your spouse’s claim is resolved. If you make the beneficiary someone other than your spouse, including your revocable living trusts, it may be a good idea to get a signed statement from your spouse waiving his or her rights to any community property interest in the benefit.

8. But I Don’t Have A Trust
One of the chief reasons that people don’t name their Trust the beneficiary of their life insurance is they don’t have a Trust. A valid, legal trust must exist at the time of your death to be the beneficiary. Life insurance proceeds which are distributed to a living trust will avoid probate. Testamentary trusts are drafted as part of a will and take effect after the death of the grantor. Proceeds distributed through a testamentary trust pass through the “probate” process after the grantor’s death because the trust is included in the will.

That leads us to the next logical question of “why no trust?” It is estimated that 64% of Americans don’t even have a simple will and 90% do not have an up to date comprehensive estate plan.

When asked why they haven’t put a plan in place 27% said there wasn’t an urgent need and 15% said they didn’t need one at all. Most said they just hadn’t gotten around to it yet but that isn’t all. Most people don’t like to think about death and quite a few believe that by planning their estate they may be hastening their own demise. Think about the saying, “I’m so far behind I’ll never die.” A significant number falsely believe that estate planning is only for the rich with a multi-million-dollar net worth.

For those that acknowledge the benefits of planning, cost and complexity top the list of reasons for not having their essential documents in place. And when you consider that sitting down with an estate planning attorney for hours discussing their personal finances, intimate personal relationships, health concerns and their own ultimate demise, knowing that they will probably end up spending thousands of dollars for a pile of documents they don’t really understand, can you blame them.

Interactive Estate Document Systems ( was created to address those concerns. The goal was to provide the highest quality estate planning documents and client education to enable our clients to fully understand the options available to them as they move through the estate planning document formulation and creation process.

While the entire IEDS process is simplistic, easy and intuitive, the questionnaire is dynamic, state specific and attorney drafted to ensure the completed assembled document set is accurate and fully legal. It utilizes highly intuitive, context sensitive, question and answer dialogs for the preparation of quality customized documents.

This is the same document assembly software that I utilize in my private law practice and is constantly kept up to date with changes to state and federal law.

Pricing is straightforward and reasonable with a Couple Revocable Living Trust Package available for $750 and a Single Revocable Living Trust Package available for $495.

What’s included?
A Custom Law Firm Quality Probate Avoidance Living Trust
Declaration of Trust
Certification of Trust
Assignment of Personal Property Instructions for the Distribution of Personal Property
Durable Power of Attorney Advance Health Care Directive, (which includes a Living Will)
Last Will and Testament (including guardian nomination if needed)
HIPPA Authorization and Waiver Final Disposition Instructions (i.e., “Burial Instructions”)
Instructions for Transferring Assets to the Trust
The Completed Transfer Document Templates
One Year of DocuBank Online Document Storage with 24/7 access to Advance Health Directives
Unlimited Revisions for the First Year (with an optional maintenance plan for $9.00/mo)

Making your Trust the beneficiary of your life insurance provides tremendous advantages in structuring your estate plan and should always be considered as the preferred choice when naming your life insurance beneficiary. If you are in need of a Comprehensive Estate Planning Document package, we’d love to help. Click here for more information.

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It’s Always Best to Start at the Beginning

Getting Started

As the good witch Glinda said in the Wizard of Oz, “It’s Always Best to Start at the Beginning.”  So, in this first post we will attempt to do just that.  Interactive Estate Document Systems, was born with the objective of bringing together world class document assembly software with an Estate Planning Language Library used by practicing lawyers in their own firms and making that technology available to anyone at a very reasonable price.

One of the biggest problems with DIY Estate Planning is a serious lack of information.  Estate Planning properly done can be incredibly simple or unbelievably complex depending on your personal situation and your individual choices. Smart people know what they don’t know.  Then they make a choice.  Either they hire an expert or they gain that knowledge through self study.’s mission is to bring specialized knowledge of Estate Planning to you, empowering you to be your own Estate Planning expert.

Let’s be honest here.  if you Google the term “Estate Planning” which I did a few seconds ago, you will get about 7,140,000 results in .66 seconds.  Much of it is very good.  Much is not. So one of your first challenges as neophyte Estate Planner is cull through the mountain of information and separate the wheat from the chaff.  But wait, you’ve still got a mountain of wheat.  More information than you possibly process and then you are still left with a herculean  task.

How do you write your documents in a way that captures your dreams and desires, accomplishes your goals and communicates your values, while doing so in compliance with your resident state law requirements without spending thousands of dollars?  Even after you’ve done the heavy lifting of assembling the lists of what you have, located the deeds, titles, account statements, life insurance policies, beneficiary designations and the rest; even after you’ve faced the psychological trauma of imagining the worst case scenario of you or your lifelong partner dying or becoming disabled or those you care for now still being dependent on you for support; even after all that work, you still need to put it in words.  The written word is the only way you have to make it all happen.

Is a Simple Will the answer?  In my experience as an estate planning attorney, I would give you an emphatic no 99% of the time.  Yet the most recent surveys tell us that over 70% of Americans don’t even have this most basic starting point document. But if you only have a Will you are almost guaranteeing your heirs will have to deal with Probate.  More about Probate later but the general rule is you do not want your estate settled in the Probate Court.  So generally speaking a Simple Will is not the best solution.

What about a Revocable Living Trust?  Most estate planning professionals agree that this should be the cornerstone to your planning documents.  For most people it will be your main dispositive (how you provide for who gets your stuff) tool. It becomes effective immediately upon signing and placement of your property into the trust.  For the assets placed in the Trust, it avoids Probate and can be written in such a way that all of your objectives can be addressed.

What other documents are frequently seen or used in an estate plan?

  • Power of Attorney
  • Pour-Over Will
  • Advance Health Care Directive
  • Health Care Power of Attorney
  • HIPPA Authorization or Waiver
  • Pet Trust
  • Special Needs Trust
  • Irrevocable Life Insurance Trust
  • Charitable Trust
  • Firearms or Gun Trust/NFA Trust
  • Business Buy-Sell Agreement
  • Digital Assets Inventory and Instructions
  • Qualified Retirement Assets Trust
  • Dynasty Trust
  • Asset Protection Trust

It is important to remember that your Estate Plan is unique because you are unique.  No one has exactly the same set of circumstances, the same family issues, the same assets or the same values.  Your plan should be designed to consider all of these and reflect you and your family as one-of-a-kind.’s software allows you to do just that.  It is powerful – but user friendly.

The document drafting system’s true power will be unleashed, however, by coupling it with the educational Estate Planning Concepts provided by in our Estate Planning Training Academy.  With training, from basic concepts to digging deeper into advanced planning techniques our objective is to give you all the tools you need to become a DIY estate planning guru. We will share real life examples to assist you in playing the “what if” game that is crucial in drafting your comprehensive estate plan.

While no one can plan for every contingency, we will equip you so you can be confident that you have done your best and have peace of mind and a greater sense of security you have done right by your family.

Your comments and suggestions on what you would like to see and learn about are welcomed.  Just like your estate plan is not once and done, this website and blog are a work in progress.  Help us help you.  Destination Emerald City.