Life insurance is an important part of many people’s planning. If you are a married couple and your goal is to keep your estate out of probate, policy ownership is critically important. Overlooking this point can make probate unavoidable and lead to other negative consequences.
The Importance of Policy Ownership
Some very basic facts: First, a life insurance policy involves three parties. They are the owner, the insured, and the beneficiary. Second, an asset that is not beneficiary designated, in a trust or jointly owned will have to go through probate when the owner dies.
A life insurance policy has a beneficiary(ies), of course. But think about what happens if you are the only owner of the policy and not the insured: When you pass on, the policy will become part of your estate. It is an asset that will go through probate so that ownership can be transferred from you, the decedent, to someone else – most often for married couples, the surviving spouse becomes the new owner. The survivor will still have to keep paying premiums to keep the policy in effect. But while the asset is in probate, the surviving spouse has no access to it or control over it.
Here’s a concrete example: John and Mary Jones are a married couple. When their first child iss born, John purchases a life insurance policy on Mary’s life, naming himself as the beneficiary and their son as the contingent beneficiary. A few years after purchasing the policy, Mary and John have a second child. Then John dies. At this point Mary discovers that although she is the insured party and her son is the contingent beneficiary, she has no control over the policy. She cannot cash it in if she needs the money. She cannot change the beneficiaries to include the second child born after the policy was purchasd. She can do none of these things until the probate process is finished and the title of the policy is transferred to her – and probate can take a very long time.
The Solution
Fortunately, there is an easy workaround to prevent this kind of situation. Here are two options:
- While the owner is alive, change ownerhip to joint ownership with the owner’s spouse; or
- Create a joint living trust and make the trust the owner of the policy.
An important note: There could be negative tax consequences if you designate as co-owner anyone other than your spouse or your living trust.
Our attorneys will be happy to discuss your estate plan with you and how your life insurance coordinates with it. Call our office for a consultation at 561-625-1100.
