Forbes’ recent article titled “How To Fund A Trust With Life Insurance” explains that a trust is a legal vehicle in which assets are legally titled and held for the benefit of another party—the beneficiary. The article says that trusts are often funded with a life insurance policy. This will provide assets to be used after the death of the insured for the benefit of their family. If you are a parent of minor children, the combination of life insurance and a trust may be the best way to make certain that your children have their financial needs satisfied and also make sure the assets are used in ways you want.
Trusts are either revocable or irrevocable. A revocable living trust is the most frequently used type of trust. It has some major benefits, like the ability to avoid probate, which can be an expensive and lengthy process. Assets in a revocable trust are accessible much more quickly than those left through a will. Because they’re revocable, the person who creates the trust (the grantor) can also make adjustments to the trust, as their situation changes.
A grantor will fund the trust with assets for the trust beneficiaries. For parents of minor children, funding a trust using term life insurance is an inexpensive tactic to make certain that your children are cared for after your death. Typically, each parent buys a life insurance policy, and in a two-parent household, usually each spouse names the other as the primary beneficiary with a revocable living trust as the contingent beneficiary.
If the second parent were to die, the life insurance policies would pay to the trust. The trustee would manage the trust assets for the minor children. Funding a trust with life insurance also benefits heirs because it provides liquidity right after your death. Other assets like investment accounts and real estate can be very illiquid or have tax consequences. As a result, it can take a while to get to that equity.
On the other hand, term life insurance is a fast and tax-free funding way to build a trust. Purchase a term life policy that will last until your children are adults and out of college. In making the life insurance paid to a trust with your children as beneficiaries, you also have some control over the assets. If you name minor children as beneficiaries on a life insurance policy, they won’t be able to use the money until they are an adult. Some children may also not be financially responsible enough to manage money as young adults in their 20s.
If you already own a life insurance policy and want to create a trust, you can transfer ownership of the policy to the trust. We encourage you to work with an experienced estate planning attorney.
Reference: Forbes (Sep. 17, 2020) “How To Fund A Trust With Life Insurance”