Leaving Life Insurance Proceeds To A Trust: Does It Make Sense?
When you purchase a life insurance policy, you will very likely name a minor child as a beneficiary, if you have one. That’s natural, and that’s why you have life insurance—to take care of people you love. And, of course, we don’t anticipate the worst, so our assumption is that our minor children won’t be minors when it comes time to collect the policy.
But have you given thought to what happens if your children are minors when something happens to you, and thus, it’s time for them to collect the life insurance policy?
When Minors are Left With Life Insurance
Sure, perhaps you have a surviving spouse, and you may assume that your spouse will manage the money for and on behalf of the children until they are adults. But the probate court doesn’t see it that way. The probate court won’t just take a hands off approach and let your surviving husband or wife do whatever they want with the life insurance proceeds, assuming that they are doing what’s best for the child.
That means that the money you left to your minor child from the life insurance, will not be able to be used unless it is under the supervision and approval of the probate court.
And if you are divorced, and the children’s mother or father is remarried, you also may not want to leave life insurance proceeds to the minor, because of the chance that it will end up being managed or controlled by an ex spouse or his or her new spouse (step parent).
Using a Trust for Life Insurance
One strategy to avoid this from happening is to name a trust as a beneficiary on the life insurance policy. There are a number of benefits to this.
Like anything left in a trust, it means that the life insurance proceeds will not have to go through the probate process.
And because you dictate the terms of the trust—when and how funds are distributed—you maintain control and ensure that the money isn’t lost, wasted, or spent frivolously. But at the same time, you also give your minor child immediate access to the funds, as all the trustee needs to do is ensure that the use of the money complies with your instructions left for the trust. There is no court approval or process needed to slow things down.
In some cases, and depending on the type of trust, the life insurance proceeds are also protected from both your, and your beneficiary’s creditors.
Plan in Advance
There are some considerations. If you have multiple people on your policy, you may have to dictate what part of the policy goes to whom.
And, leaving money to a trust from a life insurance policy could result in paying higher taxes—although not always. By planning ahead, you can consult with tax professionals to ensure that there are no negative tax implications.
We can help you plan your estate based on your individual needs. Call the Torrance probate will and estate attorneys at Samuel Ford Law today.
