Does life insurance need to be included in my trust?
Many questions related to life insurance arise when I meet with clients to talk about their estate plan. For many people, the life insurance policy is a significant portion of their total estate. However, the proceeds from a life insurance policy are not normally included in the basic will or trust estate plan. A life insurance policy is what we call a “beneficiary” account. It means that the value is paid directly to a person or entity named in the policy.
The good news for many people is that those proceeds go directly to the beneficiary (usually a relative) and that amount does not count towards the threshold that triggers a probate proceeding. In Arizona, the threshold is $75,000.00 of assets that will trigger the need for a probate proceeding. But life insurance proceeds of, say, $250,000.00, can pass directly to a spouse or child, or other beneficiary, and that amount does not apply towards the threshold. Thus, it is not necessary to include the life insurance policy in the estate plan, and you can still avoid probate.
It is nevertheless very important for people who hold life insurance policies to think about and properly designate beneficiaries. For example, a trust may include a “spendthrift clause” which allows the trustee to make distributions as he or she deems fit. Life insurance proceeds, on the other hand, will result in a check being written directly to an individual with no restrictions. A trust can be the beneficiary of a life insurance policy (often as the alternate to a spouse or child), but the circumstances vary so widely, it is impossible to address all of the options here. My purpose is simply to raise the question so that readers can be informed of all of the implications. If you have not paid attention to this lately, I strongly suggest that the time is now. A person can have peace of mind when these details are addressed and taken care of.