Who gets life insurance payout

Dear Len & Rosie,

I have a $100,000 life insurance policy. I also have a twenty-four year old son from a previous marriage. He's in drug rehab. Originally my son was the beneficiary of the policy, but since I found out about his drug use I thought it best to leave it to my wife. She has agreed to dole out money to my son as he needs it.

If my wife and I pass away tomorrow who will get my life insurance? Is there some document I can draw up that would allow my son to benefit from the insurance without being able to spend it all on drugs?

Barry

Dear Barry,

If your wife dies first, your $100,000 insurance policy will pass to the alternate beneficiaries that you named on the insurance company beneficiary form. If you have not named any alternate beneficiaries, then most policies will pay out to your probate estate. If that happens, all or part of the money will probably wind up in your son's veins.

If you are survived by your wife and she gets the money, she may not leave it to your son when she dies. The money will be hers and she will have the right to leave it to anyone she wants upon her death. There's also no guarantee that she will not become frustrated with dealing with your son and simply keep the money for herself. Remember, he's not her son, and she may not be willing to be his keeper for the rest of her life. Clearly, you need some estate planning.

You should create a revocable trust, and name it as the primary beneficiary of your life insurance policy. A trust would protect your son's inheritance, even if you are survived by your wife. Your wife can be the trustee after your death, and she can manage the money for your son's benefit - spending money on him as he needs it. You can also name successor trustees who will take over if your wife is unable or unwilling to do the job.

A trust like this can be flexible. You can give the trustee discretion to make or withhold payments directly to your son, or spend money for his benefit, depending on your son's condition. You can even allow the trustee to end the trust and give your son his inheritance outright, if he cleans up his life. If your son is on public benefits, your trust can give him his inheritance within a special needs trust that will not cause him to lose his eligibility for Medi-Cal.

A better alternative may be to leave your son his inheritance within a dynasty trust that will provide better protection against your son's creditors. You have a lot more options than giving the money to your wife and hoping for the best. You should see a trusts and estates attorney and figure out the best way to provide for your son while also protecting him from himself.

Len & Rosie