Life Insurance, Beneficiary Designations and Asset Protection

A recent case I have been working on has reminded me again of the importance of thinking through your beneficiary designations.  In Utah, “the proceeds or benefits of any life insurance contracts or policies paid or payable to the spouse or children of the debtor or any trust of which the spouse or children are beneficiaries upon the death of the debtor, provided that the contract or policy has been in existence for a continuous unexpired period of one year” are exempt from execution.  It is not uncommon for the parents of minor children to say “We don’t want our child to get all of that money at age 18 so we are going to list Grandma or Grandpa as the beneficiary so they can give the money out to Johnny a little more slowly.”  Here is the problem; if Mom or Dad owed money to a creditor when they died, that creditor may now be able to seize the proceeds of the life insurance policy.  The life insurance policy has been converted from an exempt asset to a non-exempt asset.  The better way to ensure that Johnny doesn’t get all of the money when he turns 18 is to establish a trust with Johnny as the beneficiary.  The trust can then set the distribution schedule while remaining exempt from creditors.So, as they used to say on the old police show Hill Street Blues – “Be careful out there!”  A lot of traps exist for the unwary – so get good advice.