Life Insurance & Your Estate Plan

Your life insurance may mess up your estate plan.

Life insurance is a key element of most estate plans, but an improper, or ill-considered beneficiary designation, can ruin the best of plans.

Upon your “passing”, life insurance proceeds, are paid pursuant to the exact terms of the policy, that is to say, the insurance company provides the proceeds to whoever you designate as the beneficiary of the policy.

If a spouse is named as the beneficiary, and the spouse survives, the life insurance proceeds will be part of your taxable estate BUT the proceeds will qualify for the marital deduction. Therefore, no estate tax will be generated by life insurance proceeds paid to a surviving spouse.

Upon ANY change in your marital status, whether as the result of a divorce, or a marriage, you should contact your insurance agent to make sure your beneficiary designation is still accurate. An “ambiguity” (and a very awkward familial situation) can arise if “my spouse” is designated as the beneficiary and your “surviving” spouse is not the same person who was your “spouse” at the time you bought the policy.

If your spouse does not survive you, or, if you name a child (or children are) as the beneficiary (beneficiaries) on your life insurance policy, there could be significant problems.

In many cases, a properly drafted Will contains provisions for the establishment of a trust for the benefit and protection of beneficiaries, and to prevent the beneficiary from squandering the funds at a young age.

HOWEVER, if your children are individually named (example: Sam and Becky in equal shares) or collectively named (example: “My Children in equal shares”) as the “contingent” or “secondary” beneficiary or beneficiaries (they receive the proceeds if there is no surviving spouse), they will receive the insurance proceeds[1] when they reach “legal” age[2] – REGARDLESS OF ANY TRUST CREATED BY YOUR WILL.

Another problem can occur if there are children who are born AFTER the beneficiary designation. If your beneficiary designation is “My Children: Sam and Becky” as the contingent beneficiaries, what does that mean for Jeff, your son, who is born three years after you bought the policy, but there has been no change of the beneficiary designation?

Avoiding these pitfalls is really quite simple:

First, you need a properly drafted and fully executed will which reflects your intentions; including, but not limited to, any trust to be created to protect your family members.

Second, check with your insurance agent to make certain that the beneficiary designation will be in harmony with your estate planning objectives. This may require you to change your contingent beneficiary designations to: “the Family Trust created by my Will”; or “my Estate” rather than “my children” or naming the children themselves.

Finally, review your Will and beneficiary designations on your life insurance every few years. If you have not reviewed your Will and/or the beneficiary designation on your life insurance in a few years, you should do now.

An improper, ambiguous, or out of date beneficiary designation could cause your life insurance to mess up your estate plan instead of meeting your objectives.

[1] The Proceeds will be held in a conservatorship, until the beneficiary reach the “legal” age. The conservator is a court appointed and supervised individual or bank who invests the proceeds, and makes payments, for the benefit of the “ward”.

[2] “Legal” age (the age when an individual is no longer a “minor”) varies from state to state. In Iowa this is age 18.

Durable Power of Attorney for Health Care

You’ve been become ill or been injured. You’re unconscious, or, you are simply in so much pain that you can’t speak; or you are no longer “competent”. A medical decision needs to be made. NOW.

Who is going to make that decision, since you either can’t make the decision, or, you can’t communicate what you want done?

The best, and easiest, solution is for you to designate (in a notarized writing) someone to make a “health care decision[1]” for you (if you cannot make one for yourself) BEFORE the crisis occurs. This document is commonly called a Durable Power of Attorney for Health Care[2] (or a Health Care/Medical Directive).

The decision maker specified your Durable Power of Attorney for Health Care has decision making powers are as broad or as narrow as you specify. Generally, the decision maker will be authorized to determine whether “life sustaining procedures[3]” should be employed and when it’s time to let you go. HOWEVER, the decision maker cannot withhold any treatment which is necessary for your comfort or freedom from pain.

The decision maker is required to follow your wishes on these matters. Accordingly, selection of the individual for this responsibility is of critical importance. You need to choose someone who knows your wishes and is strong enough to carry them out. Although any mentally competent person of legal age (including a close friend) can serve in this role, often the decision maker is your spouse, or a family member. You should consider choosing one (or more) alternate decision maker(s) who can fill this need in the event that a previously listed individual cannot, or will not, serve.

A Durable Power of Attorney for Health Care is different from a “Living Will[4]” in several very important respects:

	Living Will	Durable Power of Attorney for Health Care
Who is the Designee?	Attending physician[5]	Any competent person of legal age whom you trust to make this decision[6]
When does it take operative effect?	Only when you are in a terminal condition and you cannot make treatment decisions[7]	Only when your attending physician determines that you are unable to make health care decisions on your own behalf[8]
What does it authorize?	Only withholding or withdrawing life sustaining procedures[9]	Consent, refusal of consent or withdrawal of any care, treatment, service or procedure (including, but not limited to, life sustaining procedures) to maintain, diagnose or treat your physical or mental condition[10]

If you are unconscious and in a “terminal condition[11]” but you have NOT prepared a Durable Power of Attorney for Health Care, decisions relative to the withdrawal of life sustaining procedures may made (in conjunction with your attending physician) by (in order):

A legally appointed Guardian (with court approval for the withdrawal);
Your spouse;
A majority vote by those of your children who are of “legal” age;
Your parents;
An adult sibling[12]

Again, if these are not the individuals you would prefer to make these decisions, or if they are not in the decision making order which you would prefer, it is necessary for you to designate an individual to act on your behalf in a Durable Power of Attorney.

Preparing or reviewing a Durable Power of Attorney for Health Care is not complicated, but it may be a tremendous benefit to your family in a time of tremendous stress. A Durable Power of Attorney for Health Care, allows you to control who will make decisions for you, and can save you, and your loved ones, from the heartache suffered by ALL of the parties in the Terri Schiavo situation.

[1] Iowa Code (2009) §144B.1(3) and (4).

[2] Iowa Code (2009) §144B

[3] Iowa Code (2009) §144A.2(8)

[4] Iowa Code (2009) §144A.3

[5] Iowa Code (2009) §144A.3(5)

[6] Iowa Code (2009) §144B.3(2)

[7] Iowa Code (2009) §144A.3

[8] Iowa Code (2009) §144B.6(1). This is inability” may be due to illness, injury or mental incompetence

[9] Iowa Code (2009) §144A.3

[10]

[11] Iowa Code (2009) §144A.2(13)

[12] Iowa Code (2009) §144A.7(1) Note: these provisions are limited to only take effect if you are in a “terminal condition”, and only relate to withdrawal of life sustaining procedures.

Will Your Life Insurance Mess Up Your Estate Plan?