When securing a life insurance policy, parents should establish a trust to own their life insurance, especially if they have minor children. The reason for this is that the trust will keep the death benefit from being under the control of the state and out of probate court, where others could try to claim their right to the proceeds.
Creating a life insurance trust is a complex process, which is why parents should work with an established estate planning attorney as well as an experienced life insurance agent.
There are many different types of trusts; the most common types of life insurance trusts for this use are Grantor Trusts such as Revocable and Irrevocable Life Insurance Trusts. However, parents can elect to secure Spousal Lifetime Access Trusts depending on the type of Life Insurance purchased.
One challenge of establishing a trust for life insurance is the cost. Typically, the cost to create a trust runs from $1,500 to a few thousand dollars, and potentially there may be associated maintenance costs over time. These costs can vary—some of the variables that can affect the cost include potential attorney trustee fees and other assets included in the trust.
There are many advantages to using a life insurance trust, and one that is particularly useful is that it creates an instruction manual for the insurance proceeds. Parents can put in almost any conditions that they want. They can set aside money for the new guardians to build an addition or pay for private schooling. They can establish incentives where there is money for a vacation if their beneficiaries get straight A's in school. They can also establish conditions where if the beneficiaries have substance abuse issues, they cannot access any money except for treatment.
However, one of the greatest benefits of a life insurance trust is that it keeps the beneficiaries from being spendthrifts, and it takes the guardian out of the position of having to say "no."Article by Jeff Spencer.
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