What are the disadvantages of naming a trust as your life insurance beneficiary?
Why do people name a trust as their life insurance beneficiary?
If you have created a living trust as part of your estate plan, you are hopefully aware of the crucial need to fund that trust. I was recently speaking with another estate planning attorney about the problem of unfunded trusts, and he referred to them as “useless pieces of paper.” He was not wrong. A trust by itself has no value, but a trust with assets properly moved into it can be extremely valuable because it bypasses the probate process. Having assets avoid probate can save time, money, and effort for your loved ones. And one of the assets to consider is life insurance.
More often than not, I counsel my clients to name their revocable living trust as the beneficiary of a life insurance policy. This ensures that the life insurance proceeds avoid probate and it allows for the trust to go into detail about how the funds are meant to be used. It can also allow for asset protection benefits if the assets are held in the trust either by a trustee who is not a beneficiary or by a trustee bound an ascertainable standard when it comes to making distributions to herself. But that does not mean there are no downsides to using a trust. In this article, I explore some of those downsides and what can be done to mitigate them.
What are the disadvantages to naming a trust as my life insurance beneficiary?
1. Trust administration takes time.
By far the biggest disadvantage to naming a trust as life insurance beneficiary is that rusts needs to be administered, which takes time. This means the money does not reach your loved ones quite as fast as it would if you named an individual as beneficiary. To understand why the delay occurs with a trust, consider what your reaction would be if you suddenly became the trustee of a relative’s trust. Would you immediately know what to do? Probably not. If you are like most people, you would want to hire a lawyer to help. And that lawyer will likely tell you not to distribute assets too quickly just in case their are debts that need to be paid off. All of this adds up to a bit of a delay in getting the money to the trust beneficiaries.
Does this mean you should avoid using a trust? Probably not. Using the trust still has a lot of benefits attached. But you should be aware of the delay when you make your estate plan.
2. Trusts can be poorly drafted.
This problem typically arises when someone uses an online form or automated draft software to make a trust. Unfortunately, those forms are often misused. And when that happens, the trust can end up being more of a problem than a solution. So, be sure that your trust has been drafted by an estate planning attorney with a deep understanding of trust and estate law.
3. Trustees can sometimes be untrustworthy.
The final issue that sometimes comes up is a bad trustee. The unfortunate reality is that not everyone is a good choice for trustee. Trustees manage all trust funds, and if you pick someone who is not reliable or trustworthy for the job, it can lead to disaster. So, be careful when determining who the trustee will be. Selection of a trustworthy trustee is incredibly important.
Conclusion
Naming a trust as the beneficiary of your life insurance policy can offer significant benefits, such as avoiding probate, providing clear instructions on the use of funds, and potentially offering asset protection. However, it's important to be mindful of the potential downsides, including delays in trust administration, the risk of poorly drafted documents, and the selection of an untrustworthy trustee. By working with a knowledgeable estate planning attorney and carefully selecting your trustee, you can mitigate these risks and ensure that your trust functions as intended, providing both protection and peace of mind for your loved ones.