Your life insurance may mess up your estate plan.
Life insurance is a key element of most estate plans, but an improper, or ill-considered beneficiary designation, can ruin the best of plans.
Upon your “passing”, life insurance proceeds, are paid pursuant to the exact terms of the policy, that is to say, the insurance company provides the proceeds to whoever you designate as the beneficiary of the policy.
If a spouse is named as the beneficiary, and the spouse survives, the life insurance proceeds will be part of your taxable estate BUT the proceeds will qualify for the marital deduction. Therefore no estate tax will be generated by life insurance proceeds paid to a surviving spouse.
Upon ANY change in your marital status, whether as the result of a divorce, or a marriage, you should contact your insurance agent to make sure your beneficiary designation is still accurate. An “ambiguity” (and a very awkward familial situation) can arise if “my spouse” is designated as the beneficiary and your “surviving” spouse is not the same person who was your “spouse” at the time you bought the policy.
If your spouse does not survive you, or, if you name a child (or children are) as the beneficiary (beneficiaries) on your life insurance policy, there could be significant problems.
In many cases, a properly drafted Will contains provisions for the establishment of a trust for the benefit and protection of beneficiaries, and to prevent the beneficiary from squandering the funds at a young age.
HOWEVER, if your children are individually named (example: Sam and Becky in equal shares) or collectively named (example: “My Children in equal shares”) as the “contingent” or “secondary” beneficiary or beneficiaries (they receive the proceeds if there is no surviving spouse), they will receive the insurance proceeds when they reach “legal” age - REGARDLESS OF ANY TRUST CREATED BY YOUR WILL.
Another problem can occur if there are children who are born AFTER the beneficiary designation. If your beneficiary designation is “My Children: Sam and Becky” as the contingent beneficiaries, what does that mean for Jeff, your son, who is born three years after you bought the policy, but there has been no change of the beneficiary designation?
Avoiding these pitfalls is really quite simple:
First, you need a properly drafted and fully executed will which reflects your intentions; including, but not limited to, any trust to be created to protect your family members.
Second, check with your insurance agent to make certain that the beneficiary designation will be in harmony with your estate planning objectives. This may require you to change your contingent beneficiary designations to: “the Family Trust created by my Will”; or “my Estate” rather than “my children” or naming the children themselves.
Finally, review your Will and beneficiary designations on your life insurance every few years. If you have not reviewed your Will and/or the beneficiary designation on your life insurance in a few years, you should do now.
An improper, ambiguous, or out of date beneficiary designation could cause your life insurance to mess up your estate plan instead of meeting your objectives.
The Proceeds will be held in a conservatorship, until the beneficiary reach the “legal” age. The conservator is a court appointed and supervised individual or bank who invests the proceeds, and makes payments, for the benefit of the “ward”.
 “Legal” age (the age when an individual is no longer a “minor”) varies from state to state. In Iowa this is age 18.