If you have anyone depending on you financially, you likely want to ensure that they don’t have to struggle to pay the bills in case the unexpected occurs. For instance, a spouse and children may have to scale back if your income or other financial support is suddenly lost. One way to prevent that is to put a life insurance policy in place.
But, how can you be certain that the proceeds of the policy will be used for what they are intended for – such as housing, utilities and food – rather than ending up in the wrong hands like creditors of the beneficiary and/or other financial “predators?”
The good news is that there are some strategies you can put in place that can prevent this from occurring, essentially allowing you to continue maintaining control over these assets from beyond the grave. Who else could end up with your money?
When you own a life insurance policy, you can choose who will receive the proceeds. The policy’s beneficiary (or multiple beneficiaries) can receive life insurance death benefit funds free of income taxation, which in turn, allows them full use of the money for paying off debts and/or continuing to pay everyday living expenses.
Typically, the beneficiary (or multiple beneficiaries) should have an “insurable interest” in you, meaning that they would suffer some type of financial hardship if you were no longer there for their support.
But what happens when the money from the insurance policy is paid out to the named beneficiaries? Once it is received by your intended recipient(s), the money that your beneficiaries inherit could actually end up in any number of other hands, such as:
It is also possible that if a beneficiary has a difficult time handling money, they could end up squandering the funds on non-essential items like vehicles, electronics and/or vacations when they should instead be managing it more prudently and allocating it for their ongoing living expenses.
There are ways you can plan ahead to prevent this from happening, though. These solutions can include putting a spendthrift provision in a trust, and/or adding a spendthrift clause in your life insurance policy.
If you have assets that are placed in a trust that will eventually be inherited by one or more beneficiaries, adding a “spendthrift provision” can be a viable option for making sure that the assets remain with your intended beneficiaries, and not with another individual or entity that is owed money by a beneficiary/recipient.
A spendthrift provision is a provision that is included in a trust that restricts the beneficiary’s ability to transfer his or her rights to future payments of income or capital under the trust to a third party. Today, most states permit spendthrift provisions that prohibit creditors from attaching a spendthrift trust. While the actual wording may differ from one trust to another, a spendthrift clause may be set forth as follows:
“No beneficiary may assign, anticipate, encumber, alienate or otherwise voluntarily transfer the income or principal of any trust created under this trust. In addition, neither the income nor the principal of any trust created under this trust is subject to attachment, bankruptcy proceedings or any other legal process, the interference or control of creditors or others, or any voluntary transfer.”
Including a spendthrift clause in a trust can have other benefits, too. For instance, a beneficiary of a trust that includes a spendthrift clause may not be able to make large purchases – such as a house – using the trust funds as collateral.
So, in essence, this provision prevents “spendthrift” beneficiaries from either squandering an inheritance before they even receive it, as well as protecting his or her inheritance from their creditors.
It is important to note, though, that there are some situations where the spendthrift clause provisions are not enforceable. These can include the following:
|Spendthrift provisions are not enforceable against|
|Child support claims|
|Spousal support claims|
|A judgment creditor who has provided services for the protection of a beneficiary’s interest in the trust|
|A claim of the state of the U.S. to the extent a statute of the state or federal law implies|
Proceeds that a beneficiary inherits from life insurance could also be quickly accessed by creditors to whom the recipient owes money. So, adding a spendthrift clause in a life insurance policy can be another option for making sure the money goes where you intend it to go, without being siphoned out of the beneficiary’s hands.
In this case, the spendthrift clause gives the insurance company the right to hold back the life insurance policy’s proceeds in order to protect the funds from the beneficiary’s creditors. In this case, a creditor of the beneficiary may not force a payment from the insurance policy in order to pay off a debt.
Another option is that the insurance company may pay out the policy’s proceeds in a series of installments – rather than just releasing a single lump sum – to the beneficiary. This, too, can help to prevent the beneficiary from going out and spending the entire amount of the proceeds all at once.
Although there are some viable strategies available for ensuring that your loved ones not only receive their intended inheritance, but that they also don’t end up losing it to creditors, former spouses or other “predators,” there can also be a lot of moving parts. Plus, not all strategies are right in all situations.
With that in mind, it is recommended that you first discuss your goals, as well as your potential solutions, with a financial professional who is well-versed in this type of planning.
Alliance America is an insurance and financial services company. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.