Your life insurance policy has a beneficiary designation which controls who inherits the insurance proceeds when you die. Neither your will nor your Living Trust control who gets your life insurance proceeds when you die. In general, it’s a good idea to name your Living Trust as the beneficiary of your life insurance.
If your Will says that your brother, Paul, gets your life insurance proceeds but the beneficiary designation names your sister, Monica, the beneficiary designation rules and Monica inherits the life insurance proceeds at your death. Trying to name a beneficiary of your life insurance in your Will is totally ineffective.
If your Living Trust indicates that your friend, Teresa, gets the proceeds from your life insurance policy, but the beneficiary designation names your friend, James, your gift to Teresa under your Trust is ineffective. James will inherit the life insurance proceeds.
There are several reasons why naming your Living Trust as the beneficiary of your life insurance is generally a good idea.
First, if you’re married and portability doesn’t work, having your life insurance flow into your Trust and fund your family Trust (i.e. B Trust) better assures that you will use your full federal estate tax exemption, saving tax dollars.
Second, if your life insurance flows into a Trust wrapped in asset protection, it can’t be taken from your beneficiaries by their creditors or divorcing spouses. On the other hand, if life insurance proceeds go directly to an individual(s), they can be seized in a lawsuit, business failure, medical crisis, or divorce.
Third, if the assets flow to an individual(s) such as your spouse and your spouse dies before funding them into his or her own Trust, those assets will have to go through the probate process.
Fourth, having your Living Trust as the life insurance beneficiary best ensures that your life insurance is coordinated with your overall estate plan.