The client, a father whose wife had passed away the year before, leaving not only her husband but also two young children, came in for a revision of his estate plan. His late wife’s parents were well off and had already set up trusts for the children. That meant that the client’s young children, even without his own wealth, would get along financially if he were to pass away. The main thing that he wanted to do, then, was to revise his estate plan so that, in the event of his death, 90% would be divided between his children (to be held in trust until maturity) and 10% among his three siblings. I drafted an amendment to his revocable trust that made that change.
The client had several life insurance policies, five to be exact. So I scheduled a conference call with the client and his insurance agent to discuss the new beneficiary designations necessary for each policy. The insurance agent was a good one. As I had requested before the conference call, he sent me a schedule of the life insurance on the client’s life for us to discuss.
This kind of schedule is a necessary and very valuable document to have in the estate planning process, provided it has been completed by a competent agent. In our client’s case, the schedule showed for each policy the name of the insurance company, the policy number, the “face amount” of the policy (how much the contract would pay on death), the policy date, the kind of life insurance (term, universal, variable, whole, etc.), the annual premium, cash values and policy loans, if any, and the proposed beneficiary designation. (We would also like to have the agent get us the latest Annual Report or Statement for each policy.)
I could see that the agent had obviously spoken to the client about the changes the client wanted to make, because the agent had added the proposed beneficiary designations to the schedule. This is how the agent described those designations:
Child 1 45%
Child 2 45%
I did not have for the conference a copy of the pertinent beneficiary change form for each of the policies or copies of the policies themselves. So I did not know what a given policy would direct in the event a contingency arose, say Child 1 did not survive the client or one of the client’s three siblings died before the client. The insurance company would have addressed contingencies like that in some fashion (not necessarily the way the client would have wanted it) somewhere in the fine print, but I didn’t have the fine print.
In the amendment to his revocable trust, however, the client specified exactly what he wanted to happen in the event that one or more of children or the siblings passed away before he did. In fact, revocable trusts that competent lawyers draft for their clients are all about contingencies. If we did not have to plan for contingencies, we could reduce the size of our documents by at least 50% and estate planning would be enormously simplified. Our widowed client knew all about contingencies, however.
In our case, then, the obvious solution to the beneficiary problem was for the client to name “the then acting trustee” of his revocable trust as the beneficiary. The trust agreement provides for all the contingencies, such as, for example, the death of a beneficiary prior to the client’s death where descendants of the beneficiary are then living, the prior death of a beneficiary who has no descendants, a beneficiary who is a minor at our client’s death, a beneficiary who is disabled, a beneficiary who is a drug user, a beneficiary who is a spend thrift, and on and on.
I suppose one could mark-up a life insurance policy’s beneficiary designation to address some of these contingencies and that there is a universe where insurance companies are happy to see a policy holder depart from its beneficiary form, so carefully crafted by its bureaucrats. But not the universe we live in. Furthermore, our client had five insurance policies. That means that if our client wanted to use the beneficiary designation itself to address the contingencies that concerned him, he would have to make those changes five times. And, if at any time thereafter he wanted to make a change, he would have to obtain five more forms from the insurance companies and see that the insurance companies properly processed his changes.
Doing beneficiary planning through the revocable trust, however, is like one-stop shopping. Once all five policies name “the then acting trustee” of the client’s trust as the beneficiary, the client can make whatever changes he wants to make in his estate plan, including the plan for the life insurance proceeds, by simply signing a trust amendment. In doing so, he not only changes the plan for the assets that he owns “inside” the trust or directed to it by his Last Will, he also changes it for the life insurance policies whose proceeds are directed to the trustee of his trust.
The revocable trust, then, is like a large funnel through which assets “pour” at the decedent’s death. If the client wants to change how wealth tracks through the funnel, then the client simply changes the provisions of the trust agreement. As to a given asset, whether it is a life insurance policy or a parcel of real estate, the trick is to own them in a way that funnels them through the revocable trust.