Planning for the Unexpected with Living Trusts: Part 2
Part I of this special two-part article series discussed some of the advantages and disadvantages of living trust planning. This article will dive deeper into life insurance policies, long-term care insurance, disability insurance policies, retirement plans, and IRAs.
Provisions for disability in other common documents
Many cash value life insurance policies have cash that can be accessed if the owner/insured is disabled. Some life insurance policies also contain waiver of premium riders that will pay the premiums on the policy if the insured is disabled. Term life insurance policies will usually contain provisions for converting the policy to permanent life insurance coverage. If a disability occurs, it is particularly important that a term life insurance policy be converted to a permanent life insurance policy because once the term period expires, the insured will probably be uninsurable. Some term life insurance policies will also contain a waiver of premium riders. If a disability occurs and a term life insurance policy contains both a conversion right and a waiver of premium riders, the term policy could be converted to a permanent life insurance policy with the premiums being paid by the life insurance company.
Disability policies are specifically purchased to replace the insured’s income when the insured is disabled and unable to work.
Retirement plans and IRAs specifically allow the plan assets to be paid out prior to retirement or age 59½ without the need to pay the extra 10% early withdrawal penalties. However, the check from the insurance company or retirement plan administrator or custodian will be made payable to the disabled person – who is now unable to cash the check or deposit it.
Here is the catch
In the case of mental disability, many insurance companies and retirement plan administrators or custodians will not allow anyone other the policy owner or plan participant to access the policy or retirement plan, or to exercise and rights or privileges contained in the policy or plan. They will require a probate court to appoint a guardian before they will pay out any policy proceeds or plan benefits. This may sound strange, especially when it comes to disability insurance, because people buy this type of coverage to cover them when they are disabled.
A durable power of attorney must have specific instructions within it to allow the agent or attorney-in-fact to deal with the insurance company or retirement plan administrator or custodians and to receive the check from the insurance company or retirement plan.
If, however the life insurance, long-term care insurance, or disability insurance policies name the living trust as the owner and the beneficiary of the life insurance, long-term care insurance, or disability insurance policies, the insurance company will have to deal with the trustee, allow the trustee to exercise any rights or privileges contained in the policy, and will have to make any checks for claims or cash value access payable to the trustee of the living trust.
As to retirement plans and IRAs, the IRS has ruled that a living trust can be named as the beneficiary of the retirement plan or IRA and the plan administrator or custodian may pay the retirement benefits to the trustee of the living trust if the plan participant is disabled. The IRS has also ruled that if the plan’s participant dies, the living trust can be named as the beneficiary of the retirement plan or IRA proceeds, where the plan benefits may be paid out to the living trust over the individual, surviving spouse, or descendant beneficiaries remaining life expectancy and that the trustees of the living trust may also either accumulate or paid out the benefits to the surviving spouse or descendant beneficiaries of the trust over their individual remaining life expectancy.
How to plan for taking care of significant others
When a couple is legally married, the marriage contract imposes certain rights and obligations upon the spouses to support and care for one another. But when a person becomes disabled and is not married to their significant other, the probate court will appoint a biological family member as the guardian of the person and guardian of the estate.
There are several things that the unmarried couple should do if their wishes and desires are to be able to take care of one another should one of them become disabled:
- They should have a co-habitation agreement that spells out their property rights and occupancy rights should a breakup occur.
- Each partner should create their own separate living trust that will name the other partner either as a co-trustee or as a successor trustee.
Conclusion
There is a lot to consider, and a number of important legal documents involved when planning for disability. To better understand this topic, be sure to register for the June 30 Advisor Advantage webinar, “Planning for the Unexpected: The Advisor’s Role in Disability and Incapacity Planning." The no-cost webinar offers 1.0 CFP CE credit upon completion. Registration is available at heart.org/advantage.
Note: This is a condensed version of an article that previously ran in The Journal of Practical Estate Planning.
About the Author
Peter J. Parenti is a Wealth Strategies Estate Planning and Tax Attorney. He is also an author, lecturer and one of the founders of WealthCounsel, LLC.
