Putting your life insurance into a trust can help you control how and when your beneficiaries receive their funds.
Our hearts go out to the many Californians who have lost their homes in the wildfires that continue to ravage the Los Angeles area. In too many cases loved ones have lost their lives as well.
Reflecting on the reality of these heartbreaking circumstances made us look at our own situations; that is, if one of us perished in a fire that also destroyed our home – the biggest asset in our estates – what would be left for our heirs? How could we put them in the best possible position to benefit from our estate, to receive life insurance funds quickly, or to have resources to rebuild our homes, if that’s what they want to do?
Regardless of the type of natural disaster, you want to be sure your heirs are protected. The extra precautions and adjustments we discuss below can be valuable in any case, even without a cataclysmic event. We hope this is valuable, but, as always, we encourage readers to consult with qualified professions before making important decisions.
The Advantages of a Trust
One important step is to have your life insurance proceeds paid directly into a trust upon your death – and not simply into your estate. Set up properly, the trust owns the asset until the trust’s beneficiaries are allowed to access it. This helps keep the proceeds from becoming part of the probate estate which can cause delays – or worse, be exposed to creditors. Also, your trustee will be able to make sure the trust beneficiaries get proceeds according to your wishes.
Once you establish the trust, make it the policy owner and beneficiary. Then, regularly review your insurance documentation to ensure the property is not underinsured and that the trustee will receive the payout in the event of a claim.
Another path is an Irrevocable Life Insurance Trust (ILIT). The main difference between the two is that a trust can be changed, while changing an ILIT is difficult or not permitted. There are tax advantages, but ILIT’s may be costly to maintain. Always speak with an attorney, estate planner, and insurance agent when making these plans.
Other Insurance
Homeowner’s Insurance. Ensure you have comprehensive coverage that includes wildfire damage. Review your policy regularly to make sure it covers the current value of your property and belongings. If you die and your home is destroyed, it will fall on your executor to file a claim and notify your insurer of your death. Source: Progressive.
Mortgage Life Insurance. This can help homeowners whose beneficiaries might need help making mortgage payments to maintain the residence after your death. Source: Aflac. Unfortunately, according to a recent study, most homeowners lack sufficient coverage to rebuild their homes after a total loss. Talk to your insurance agent.
Other Considerations
Funds to Rebuild. In addition to insurance, incorporate provisions in your estate plan for rebuilding or relocating assets if necessary. This might include setting aside funds specifically for recovery efforts or designating other properties.
Legal Provisions. Update your will, trusts, and other legal documents to reflect any changes in your assets or plans due to wildfire risks. Consider including specific instructions for handling property in the event of damage caused by a wildfire or another disaster.
Document Your Belongings. Everyone should do this regardless of where you live. Thoroughly document your assets with photos, videos, and detailed descriptions. Keep these and other important documents in a fireproof safe and/or digitally backed up on a portable device and a cloud service, like Dropbox, Google Drive, iCloud, and others. This will be invaluable for filing insurance claims and conducting an estate valuation.
Wildfire Safety
Most importantly, be safe! Have a clear emergency plan in place to get you and your family to safety in the event of a wildfire. Know your evacuation routes. Check for evacuation orders and other relevant information. Have a communication system for family members. Make plans for pets or livestock. Create a defensible space around your property to reduce the risk of wildfire damage. This involves clearing vegetation, maintaining a buffer zone, and using fire-resistant materials for landscaping. Read more: What To Do if You Live in a Wildfire Prone Area – WFCA
By taking these steps, you can better protect your family and your assets to ensure a smoother recovery process should disaster strike.
As always, you will want to speak with estate planners, estate lawyers, insurance agents, and other professionals when making these important decisions. The Estate Lawyers would be happy to advise or direct you to qualified estate planners. Write to us at Hello@TheEstateLawyers.com.