How to coordinate your life insurance with your estate plan

Life insurance can be a powerful tool in your estate plan. It can provide financial support for your spouse or heirs when you’re gone. If your estate is taxable, life insurance may be used to pay estate taxes and other expenses.

As with any aspect of estate planning, the devil is in the details. Life insurance is not a tool to be used casually. It must be managed with precision to ensure it fulfills your estate planning goals.

A few tips about life insurance and your estate plan

• If you don’t want the proceeds to be taxed for estate tax purposes, you should not be the owner.

• Don’t make your estate the beneficiary. If you do, you’ll trigger probate and you may make your estate taxable.

• Review your policies periodically, particularly when major life events occur, like divorce or the death of a beneficiary. You also need to keep an eye on your financial and tax situation to ensure that your policy continues to meet your goals.

• Minor children should not be named as beneficiaries. That would likely require court involvement to approve the distribution.

• Do not name people of any age as beneficiaries of the policy if they are financially irresponsible. It’s wiser to establish a trust for them, which provides more control over how and when monies are distributed.

• If your spouse is not a U.S. citizen, consider establishing a Qualified Domestic Trust and naming him/her as the beneficiary. Don’t automatically make your non-citizen spouse the beneficiary of your life insurance, since doing so may trigger estate taxes.

• Be sure to name contingent beneficiaries in the event your first-named beneficiary predeceases you.

• If you purchased your life insurance to fund a buy-sell agreement, keep an eye on the policy to make sure it keeps up with any increase in the value of your business.

• If you are married and you do not have sufficient assets in your living trust to pass on the maximum amount of tax-free money to your heirs, you may want to consider making your living trust the beneficiary of your policy.

• If you are considering cancelling your policy, consider a life settlement rather than taking the surrender value.