Legal Definitions - facility-of-payment clause

A facility-of-payment clause is a provision found in legal documents, such as insurance policies or trust agreements, that permits funds intended for a specific beneficiary to be paid to an alternative, designated person or entity. This clause is typically invoked when the primary beneficiary is unable to directly receive or manage the funds themselves, often due to being a minor, being legally incapacitated, or having a disability. Its purpose is to ensure that the funds can still be disbursed and used for the beneficiary's benefit, even if they cannot personally accept or manage the payment.

Here are some examples illustrating how a facility-of-payment clause works:

• Life Insurance for a Minor: Imagine a parent purchases a life insurance policy and names their 10-year-old child as the sole beneficiary. If the parent passes away, the insurance company cannot legally pay a large sum of money directly to a minor. However, if the policy contains a facility-of-payment clause, it would allow the insurer to pay the death benefit to the child's legal guardian (such as the surviving parent or a court-appointed guardian) on the child's behalf. This ensures the funds are immediately available for the child's care and upbringing without needing a complex court process to establish a conservatorship for the funds.

• Trust for an Incapacitated Adult: Consider a grandparent who establishes a trust fund for their adult grandchild who has a severe intellectual disability and is unable to manage their own finances. The trust document includes a facility-of-payment clause. This provision allows the trustee to make payments directly to service providers, caregivers, or a designated representative for the grandchild's living expenses, medical care, or other needs, rather than attempting to give the money directly to the grandchild. This ensures the funds are used appropriately and effectively for the grandchild's well-being, bypassing their inability to handle financial transactions.

• Pension Benefits for an Elderly Individual: An elderly retiree receives monthly pension payments, but due to the onset of severe dementia, they become incapable of managing their bank account or paying their bills. The pension plan's terms include a facility-of-payment clause. Upon receiving proper documentation, such as a doctor's certification of incapacity or a court order appointing a conservator, this clause allows the pension administrator to redirect the monthly payments to a designated family member or the court-appointed conservator. This ensures that the retiree's essential income continues to be managed and used for their benefit, preventing disruption of their financial support even when they can no longer handle their own affairs.