Life Insurance Trust for Your Children

Susan Kelly

Dec 29, 2022

If you have purchased life insurance to pay for raising a kid if you pass away, you may also establish a trust to keep the money for the child's benefit after your passing. Trusts aren't simply for those with a lot of money. They are essential tools for households with children of all ages.

According to Scott Malin, an attorney with Lathrop & Gage LLP in St. Louis, "the majority of individuals set up a trust as part of an entire estate plan," which also includes the creation of a will and the designation of guardians. "If you have children who are still minors, it is highly recommended that you establish a trust."

Beneficiaries like your children can access the money and property held in a trust. You designate a trustee to handle the procedure, then detail how these assets should be administered and used.

When purchasing life insurance, a trust might be beneficial in the following ways: Name the trust and whoever will serve as a trustee on your life insurance policy rather than identifying your children as beneficiaries. If you meet an untimely end, the trustee of the trust will be responsible for managing and spending the money per the guidelines you established for the trust.

Be Careful When Naming Beneficiaries

Why not just designate your children as the beneficiaries of your life insurance policy instead? If you pass away while your children are still considered minors, the life insurance company will not pay benefits until the court has appointed a guardian. This requires time and money since legal expenses and court charges must be paid.

By the Uniform Transfers to Minors Act, you do not need to establish a trust to choose an adult custodian to take care of your children's inheritance (UTMA). When you acquire a life insurance policy, a life insurance agent may assist you in establishing a UTMA account and naming the custodian for the account. If you pass away while your children are still young, the custodian will manage the funds for them until they reach the age of legal majority, which varies from state to state but is often 18 or 21 years old. After that, your children will get whatever cash is left over.

Advantages of a Trust

According to Guy Baker, a certified financial planner with Wealth Teams Solutions in Irvine, California, passing on a lump payout might be an option if you have very modest insurance. But would you want your child, who is 18 or 21, to get a significant windfall with no obligations tied to it? Baker has yet to see other individuals choose the UTMA option.

Compared to a UTMA transfer, the flexibility offered by a trust is superior. For instance, you can set up a trust that pays for your children's college educations and their day-to-day expenses. According to Baker, it is then possible to pay your children part of the leftover money on predetermined dates, such as their 25th and 30th birthdays.

Types of Trusts

Both revocable and irrevocable forms of trust are legal options. During your lifetime, you can modify or even terminate a revocable trust. An irreversible trust can never be undone. According to Malin, a revocable trust should be sufficient unless you have a large amount of money.

Wealthy individuals can shield their descendants from estate taxes by establishing irrevocable trusts. Estate taxes are levied by the federal government and certain state governments on a property at the time of inheritance. When determining whether or not to tax an estate, the assets held in an irrevocable trust are often excluded from the calculation.

The federal government will only levy inheritance taxes on estates with a value of more than $11.4 million for an individual or $22.8 million for a married couple in 2019. These limits move about yearly since they are tied to the inflation rate. The overwhelming majority of estates are not subject to federal taxes because they are not large enough.

Consider establishing a special needs trust if you have a kid with special needs. It is normally the case that disabled individuals who want to participate in government assistance programs cannot hold more than $2,000 worth of assets in their names at any time. Your kid may continue to be eligible for Medicaid, federal and state health insurance programs, and Supplemental Security Income via the Social Security Administration, provided they have assets held in a special needs trust. These assets may include money from a life insurance policy or other funds.

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