Understanding the Legalities of an Irrevocable Beneficiary

Most life insurance policies, trusts, and annuities establish beneficiaries on a revocable basis. However, there are certain instances in which a policy holder may choose to establish an individual, such as a child, as an irrevocable beneficiary. The establishment of an irrevocable beneficiary provides additional assurance that policy established will indeed go to the intended recipient upon the policy holder’s death in its entirety.

What Exactly is an Irrevocable Beneficiary?

Ordinarily, a policyholder retains the right to make any changes to the terms of their life insurance policies or remove the beneficiary all together without their prior knowledge or consent. However, establishing someone as an irrevocable beneficiary specifically sets the terms of the policy so that it cannot be changed or altered without the consent of the beneficiary. It can be especially beneficial for parents to name children as irrevocable to provide an additional assurance that the proceeds will go directly to the care of the child in the event of their death.

Establishing a Beneficiary as Policy Recipient

Although there is much peace of mind to be had by a parent when they establish an irrevocable trust, there are many additional legalities and complexities involved in this process. This is primarily because establishing an individual on an irrevocable basis entitles them to additional and significant tax savings on the entirety of the policy, trust, or annuity amount. Additionally, any monetary amounts, goods or properties put into the trust are forthwith signed over into the hands of a trustee to be held by and administered to the beneficiary according to the terms of the established policy.

Making the Trustee Accountable

One of the obligations as trustee is to provide a regular accounting of all monies, properties, stocks or annuities being held. In addition, any expenditures necessary for the maintenance of the account must also be detailed in an accounting log to ensure that all legal provisions are being met. The policy holder has the right, at any time, to ask for a full and detailed accounting of the assets being maintained in the trust.

Other Situations Necessitating an Irrevocable Beneficiary

Often when dealing with situations such as divorce, a judge may rule that one spouse be named as irrevocable beneficiary to an ex-spouses insurance policy. By doing this, a judge ensures that the spouse ruled in favor of is financially compensated upon the death of the other spouse. For example, if a couple who had been married for 20 years divorces, and the wife has never worked outside of the home, a judge may rule that the spouse be named as a beneficiary to the ex-husbands life insurance policy, upon the death of the husband; thus ensuring that the wife is financially provided for even after the ex-spouse passes away.

Even though a policyholder cannot alter or terminate a trust alone, he or she can terminate the trust with the express permission of the beneficiary. Furthermore, the beneficiaries retain the right to close the account themselves at any time.