For some people, wills are the foundation of a broad and comprehensive estate plan. For others, wills are the only documents they establish. Ensuring that a will properly addresses the needs of dependent family members and the distribution of various resources is important for a testator’s peace of mind.
Unfortunately, in their desire to plan thoroughly, they could potentially make mistakes that have significant consequences in the future. While it is possible to arrange for most resources to transfer to specific beneficiaries by including them in a will, there are some assets that might require additional consideration.
People with high-value resources may choose to fund trusts and make alternate arrangements to prevent their loved ones from fighting over their resources or minimize estate tax obligations. They may also need to address one particularly important resource with outside parties instead of in their estate planning paperwork.
Life insurance providers control policy payout
Contrary to what many people might expect, a will is not an appropriate place to provide instructions regarding the distribution of life insurance proceeds. Although a will is a testamentary instrument that carries significant weight in probate court, certain resources are under the control of outside parties during estate administration.
That is generally the case for life insurance proceeds. The insurance company has a contract with the policyholder. They file a document that explains who should receive the funds from the policy when the policyholder dies. Although testators can certainly clarify what they have already designated with their life insurance company in a will, they cannot dictate what happens with the policy in their will.
The unfortunate reality is that many people attempting to draft or update their own estate planning documents might be unaware of this fact. If their will contradicts the documentation maintained by the insurance company, the prior beneficiary designation they filed with the company is what determines the beneficiary of the policy.
Policyholders may need to make a point of updating their wishes with their insurance providers when they make any other significant changes to their estate plans or their families. In some cases, those with sizable life insurance policies might even use the funds from the policy to fund a trust. Doing so can give them more control over the use and distribution of policy proceeds after their passing.
Life insurance can be an important component of an estate plan, even if the estate planning documents don’t control who receives the payout from the policy. Creating and routinely updating an estate plan can help people provide for their loved ones and leave a positive legacy.