Should children or the surviving spouse be the beneficiary?

Answer 1

This is a good question. The answer depends on what your are making the beneficiary designation for. That is, an estate, trust, life insurance policy, IRA or retirement account, bank account. Also, what is the total amount of your assets, are you in a community property state? Finally, what do you want to accomplish. Also, estate plans and most policies and accounts allow you to divide between several beneficiaries and name successor beneficiaries, who take the asset if the primary beneficiary fails to survive.

The most basic answer to the question is then beneficiary should be whoever you wish to receive the property when you die. For most married couples with moderate estates, their estate planning documents, life insurance, etc., will name their surviving spouse as the beneficiary. Where the estate is sizable enough sometimes the couple will establish particular gifts for children. Particularly if there are children of a prior marriage or relationship.

For gifts going to minors (under the age of 18), most states have a version of the Unified Transfer to Minors Act. This act (generally) places a minor's property into the hands of a custodian. A court order is required to access (withdraw) the funds in the account. The entire account comes under the minor's control when they reach age 18. (In California, you can delay this to age 21, but you must include the directions in your estate plan.) As an alternative, where the funds are substantial or require significant management, a guardian of the Minor's estate may be required.

The custodian or guardian is normally appointed by the court, but you can specify one in your estate plan.

To avoid a custodial account or guardianship, or delay distributions beyond age 21 (in California) you will need to establish a trust for your minor child. The good news is that this can be an "empty trust" (holds no assets) until your death.

Some assets, as a general rule, should always designate a person as the beneficiary (or beneficiaries). Life insurance and IRA in particular. Life insurance policies are income tax free to the beneficiary (but included in your gross estate for estate tax- more on that in a bit.) So, designating a beneficiary other than your trust or estate makes the most sense.

IRAs (Traditional IRAs) have an additional reason to name real people as beneficiaries. You may recall that IRA distributions are taxed as income. When a person, or persons, inherit a IRA account as a designated beneficiary they can: 1) Cash out immediately; 2) Cash out over a five year period; 3) Take the IRA as an "inherited IRA" requiring them to take a required minimum distribution and allowing them to take additional distributions as needed. While the money they receive is still taxed as income, they can stretch the liability over many years- and they can grow the IRA without paying taxes (except on distributions.) Better yet, they can designate their own beneficiaries and continue this cycle for generations. (Until the feds change the rules.)

In contrast, if your estate or trust is the beneficiary of a traditional IRA, they must cash out immediately (Trusts and estates cannot "own" and IRA). As trusts and estates pay the some of the highest income tax rates, this usually is not the optimum answer.

And, of course, if you name no beneficiary for your life insurance or IRA, the assets are subject to probate which may increase cost of administering your estate.

Estate tax planning is less of an issue under the current rules, except for very large estates. The current exclusion amount for 2016 is $5,450,000 (it increases annualy until the feds change the rules.) Also, the surviving spouse gets the benefit of both an unlimited marital deduction (all property going to the Survivor escapes estate tax) and portability (where the survivor gets the unused portion of the deceased spouse's gift and estate tax.)

Of course, this is for Federal Estate Tax- some states may have an estate tax (based on the amount of the decedent's estate) or an inheritance tax (based on the amount the beneficiaries receive), or both.

What this means is that a married couple can effectively shield more than $10,000,000 of property passing to their heirs with a very simple estate plan.

For larger estates (or estates anticipated to grow substantially), there are some additional estate planning devises to avoid estate tax. An ILIT (Irrevocable Life Insurance Trust) is one. An ILIT is a trust which owns an insurance policy on your life, and because you do not "own" the trust the policy is not included in your estate for estate tax calculations. But, they are irrevocable, so you can not change your mind latter. And, ILITs have other administrative, cost and tax considerations associated with them, so a careful analysis is required for their optimal use.

As you can see, the question of "Who should be the beneficiary?" is a more complicated question than it appears, and the advice of a qualified estate planning attorney is generally worthwhile and recomended.

Answer 2

No, but if they aren't, they usually have to sign a document in front of witnesses that they know they are not going to get it. Otherwise they will sue the life insurance company claiming they didn't know. No. Life Insuarance is used in situations other than marriage. Sometimes in business partners have policies on each other to compensate for their loss. Employers can also have policies on key employees to compensate for losing them.

An insurance company will most likely be looking for what is called "Insurable interest." There has to be something that the beneficiary would lose should the insured die that the death benefit would compensate for. This is to stop you from taking out policies on any number of random people to collect if any of them die like some sort of morbid lottery.

Answer 3

The spouse should be the beneficiary.