Many people purchase life insurance policies to protect their loved ones if something happens to them and they pass away. Beneficiaries can use life insurance benefits to…
- Cover funeral and burial expenses
- Pay off debts
- Cover expenses after lost financial support
- Pay for college tuition or other large expenses, and more
However, did you know that life insurance policies can also cause certain estate planning issues for some people?
Potential problems with lump-sum life insurance payments
Insurance companies will issue one lump-sum payment to a life insurance beneficiary after the policyholder’s death. This can cause problems for some, such as:
- The beneficiary does not have the experience to manage a large windfall and wastes the funds
- The beneficiary relies on Medicaid or other public benefits, and the windfall makes them ineligible for those benefits until they spend the proceeds
- Your intended beneficiary is a minor
Life insurance policies can also increase the value of your estate, which may lead to estate tax liability for people with significant wealth.
How to avoid these problems
The good news is that you can create an irrevocable life insurance trust (ILIT) to have greater control over what happens to the proceeds of your policy.
In an ILIT, you transfer ownership of a policy to the trust and draft a detailed trust document for instructions for distribution. Funds can be distributed over time or upon a certain event, just like other types of trusts. This helps to eliminate many of the possible downfalls of single lump-sum life insurance payments.
Contact your Eugene Estate Planning Lawyer for more information
Many people are unaware of estate planning tools such as an ILIT. By discussing your situation with an experienced trusts and estates attorney, you can ensure all your bases are covered.
To discuss your comprehensive estate plan, including if you should have an ILIT, contact Megan today for your FREE consultation.