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Who should be the beneficiary of your life insurance policy?

Your primary thought when purchasing life insurance in Michigan is probably to provide for your family if you die suddenly. How that policy is set up and who you name as beneficiary could make a big difference in when your children receive the money, and how much, as well.

According to FindLaw, you can set up an irrevocable life insurance trust to avoid probate, lower taxes and provide for your children long-term. The trust becomes the beneficiary of the policy, and your children are the beneficiaries of the trust. Because your estate is not the beneficiary of the policy, the payout goes directly into the trust rather than through the probate process, and your children can benefit immediately according to the instructions you have provided for the trustee.

The proceeds of the policy do not increase the size of the estate since they go to the trust, so estate taxes are not raised by the payout. Paying for the policy premiums by transferring money to the trust as a gift ensures that you will not pay gift taxes as long as you do not exceed the limit for the year, which is set at $14,000 in 2017.

You may designate strict instructions for how your children use the money they receive from the trust. For example, you may have a certain amount transferred to college education accounts, and have the trustee provide an allowance for living expenses, needs, special occasions and other designations as you choose. You could also determine when your children would receive the balance, whether that may be an event, such as college graduation, or a date, such as a 25th birthday.

This information about life insurance trusts is general in nature and should not replace the advice of an attorney.

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