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Should I Leave My Life Insurance Policy to My Estate?

Many people purchase life insurance to provide for their family’s long-term financial needs. Although life insurance is an important estate planning tool, it is generally not a good idea to name your estate as the beneficiary of any life insurance policy. For one thing, if the proceeds of your life insurance policy pass through your probate estate, your creditors can present claims against it, reducing the cash available to your family or other intended beneficiary. Even if you are not worried about creditors, allowing the policy to pass through probate can still impede your family’s access to immediate cash benefits.

Life Insurance Remains “Community Property” Despite Naming Estate as Beneficiary

Naming the estate as beneficiary may also create unnecessary confusion, which in turn can lead to litigation. Here is a recent example from here in California. This is only an illustration and not a complete statement of California law.

In this case, a California man purchased a life insurance policy using the proceeds he received from the settlement of a personal injury lawsuit. The policy provided him with a monthly annuity payment, and upon his death the man’s wife was named as sole beneficiary. However, several years later, the wife withdrew principal from the policy in order to finance some home repairs. This required a partial sale of the annuity, which was subject to Virginia law and required approval from a court in that state. As part of the approval process, the named beneficiary on the policy changed from the wife to the husband’s estate.

After the husband died without leaving a will, the wife petitioned for appointment as executor of his estate. She said the only asset in the estate was the annuity, which was community property, and therefore belonged to her as the surviving spouse. One of the husband’s children from a prior marriage objected to this, arguing the annuity was her father’s “separate property” and therefore one-half of the annuity should pass under California intestacy law, which would benefit his multiple children.

A probate judge rejected the stepdaughter’s lawsuit. The court agreed with the wife the annuity was “community property” at the time of her husband’s death and there was no reason to treat any of it as separate property. The stepdaughter appealed, but the California Court of Appeal agreed with the probate judge. The appeals court noted California law requires a “written declaration” to transmute (convert) community property into separate property. The stepdaughter argued this occurred when the life insurance beneficiary was changed from the wife to the estate. “Not so,” the appeals court said, stating one cannot “infer” such a change without an express declaration signed by the wife.

Need Help With Estate Planning?

One takeaway from the case above is that even if there is some reason you need to designate your estate as the beneficiary of a life insurance policy, make sure you have a will (or trust) that clearly states your intended disposal of such property. There is no reason family members should need to go to court in order to guess your intentions after your death. An experienced California estate planning attorney can assist you in drafting the proper documents. Contact the Office of Scott C. Soady in San Diego if you would like to speak with an attorney today.

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