You’ve probably heard about trusts. But you may have thought that trusts are only for “rich people”. That’s hardly the case. In truth, anyone can set up a trust, even if you don’t have much money. You can do it using life insurance to create a trust. And though you may not be around to see it happen, your loved ones will one day be deliriously happy that you did.
The Benefits of a Trust
A trust can provide an ongoing source of financial support for your loved ones after you die. The benefits can even be permanent, if you choose.
Trusts have major advantages over wills, including:
- A trust cannot be contested. A will can be contested, while a trust cannot. That means that your estate won’t be at risk for being tied up in court for years, or paying many thousands of dollars in legal costs.
- Legal protection. Irrevocable trusts provide protection of the trust assets against both creditors and lawsuits.
- Exact execution of your instructions. You can determine exactly how the money in a trust will be distributed. For example, you can stipulate that a beneficiary will receive a certain amount each month for a specific number of years, or that a lump sum will be paid out upon reaching a certain age.
- Management by a third-party trustee. The trust is managed by a third-party, who will be emotionally detached from the trust beneficiaries. This creates the legal obligation on the part of the trustee to make sure that your instructions are carried out, and that the trust assets are not squandered.
- Reducing your estate taxes. This only applies if you will have a multi-million-dollar estate. Since the trust owns your life insurance policies, payment of the death benefit will go to the trust, and not become part of your taxable estate.
A trust can make perfect sense if you are concerned that there may be problems, disputes, or even legal proceedings regarding your estate. It can also operate as a “spendthrift provision”, that will parcel out proceeds over a specific amount of time, rather than in a single distribution that will quickly be spent by one or more beneficiaries.
It is also an excellent tool to use if you’re concerned that your beneficiaries may not be capable of successfully managing and investing a large amount of money. Since that is done by a third-party trustee, and you can even spell out how the money is invested, it will all be handled automatically.
Creating a Life Insurance Trust
A life insurance trust is typically set up as an irrevocable trust. That means that once established, you are essentially out of the picture. With a life insurance trust that’s a perfect arrangement. Since there will be no assets in the trust during your lifetime, there will be no money to manage, invest, or distribute. An irrevocable trust also provides the greatest amount of legal protection, since it is essentially a distinct legal entity.
You set up the trust documents, spelling out all of the specific requirements of the trust. The only function of the trust during your lifetime is the payment and ownership of one or more life insurance policies. When the life insurance policies payout upon your death, the trust is then funded with assets.
Once the trust has been funded upon your death, the proceeds of the life insurance policies will be the property of the trust, not your beneficiaries. In this way, you will be able to avoid a less-than-trustworthy beneficiary getting access to the insurance proceeds, as would be the case with life insurance policies not contained in a trust. The money will then be distributed according to your instructions.
A Life Insurance Trust is Perfect if You Have Few Assets
A life insurance trust is a way to bequeath substantial assets to your loved ones upon your death. If you don’t have many assets, a life insurance trust is a way to make it happen. Sure, that’s the same thing that you can do with life insurance in general. But a trust actually creates an asset distribution system, that can ensure the long-term survival of your loved ones.
Though trusts are much more frequently used by wealthy individuals, they can have a greater benefit for those who have few assets to leave behind. This is true since the life insurance death benefit is actually the source of the trust assets. All you need is the ability to make the annual premium payments on the life insurance policy contained in the trust.
That will enable you to a amass a six-figure or seven-figure estate for your loved ones, even if you don’t have any money at all right now.
Who Pays for the Life Insurance to Fund the Trust?
We’ve already established that the life insurance policies involved with a life insurance trust are actually owned by the trust. That means that the premiums will also need to be paid by the trust. But since the trust will have no assets, and certainly no income, you will need to fund the trust so that it can pay the life insurance premiums.
But this is not as burdensome as it seems at first. You’ll be paying for life insurance even without a trust, so this will just be a matter of transferring an existing expense to the trust. In that way, the life insurance policies connected with the trust won’t represent an additional expense to you.
You will nonetheless want to keep the insurance premiums as low as possible. The best way to do this is by using term life insurance. It is considerably less expensive than policies that have investment provisions, such as whole life insurance. That means that you can buy more coverage using term insurance.
We like to help you get the most coverage you can afford at the lowest possible price. Give us a call, and we’ll help you do that, whether you plan to set up a life insurance trust, or just want to have adequate life insurance coverage.
