An effortless and straightforward way to plan for the passing of your estate is to use beneficiary designations. The problem is that beneficiary designations don’t handle contingencies very well.

Example: You have a son and a daughter. You name them both as beneficiaries of your life insurance policy. Your daughter predeceases you. What happens to the proceeds of your life insurance upon your death? Do you think the insurance company will pay all of the policy to your son? Or, will the insurance company understand that you want your predeceased daughter’s share to go to her children?

Most people think the insurance company will pay your predeceased daughter’s share to her children. But that isn’t what happens. The insurance company pays the entire amount of the policy to your surviving son. If you read the fine print on your beneficiary forms, most of them tell you that the insurance company will only pay surviving beneficiaries. The standard clause with such a notice says something like, “We will pay to the surviving named beneficiaries unless otherwise indicated in this document.”

You can avoid this problem by setting up a trust and naming the trust as the beneficiary of your life insurance. The trustee you name to manage the trust can control precisely how the proceeds of your life insurance are distributed, including any contingencies like the one in the example.

For more estate planning tips, register for my next webinar.