Asset Transfer Methods Other Than Your Will – Life Insurance

A will is one of the most important document in planning your estate, but it doesn’t cover everything. Other benefits not typically controlled by a will or trust include IRAs, insurance policies, income savings plans, retirement plans, and property owned by joint tenancy or tenancy by the entirety.

A well-crafted estate plan must coordinate all of your asset transfer methods with your will and/or trust. Using these methods together properly can give your beneficiaries money much more efficiently than a will can on its own. Without proper coordination, you can completely negate your estate plan and frustrate your own wishes. Moreover, you can cause costly litigation as your loved ones sort out your wishes.

Life insurance is often a good estate planning tool, because you pay relatively little on the front end, and your beneficiaries get much more when you die. When you name beneficiaries other than your estate, the money passes to them directly, usually without the need or expense of probate. If most of your money is tied up in non-liquid assets like your company or real estate, life insurance gets cash into your beneficiaries’ hands to administer the estate and take care of asset transfer costs.

If you own life insurance on your own life, you can have the proceeds distributed in three ways.

1. To beneficiaries. The company pays the proceeds directly to one or more beneficiaries named in your policy. This is usually the fastest way to get the money to your beneficiaries, and the proceeds pass free of income tax and can’t usually be touched by creditors. However, they may be liable for estate taxes if it is a larger estate.

2. To your estate. If you choose to name your estate as the beneficiary, the proceeds will be distributed along with your other assets according to the terms of your will, or according to the laws of intestacy if you have no will. This does make the assets subject to creditors’ claims.

3. To a trust. If you make the proceeds payable to a trust–either one set up in your will or during your lifetime–they will be distributed like the other trust assets.