Many individuals – especially those with children – do not want to think about what would happen to their family if they passed away. Although many people have life insurance to cover the cost of raising a child in the event of their untimely death, they do not think about establishing a trust to hold the money for them. Despite the common misconception, trusts are not just for the rich. Rather, they are critical tools for young families and an important part of a comprehensive Houston estate plan. Below are some of the common questions that individuals have about life insurance trusts.
How Does a Life Insurance Trust Work?
Individuals will set up a trust as part of their overall estate plan, typically, when they are creating a will and naming guardians if they have minor children. A trust holds assets – including property and money – for the listed beneficiaries, and the individual creating the trust details how the assets should be utilized. Additionally, the person appoints a trustee to oversee the process and ensure the assets are handled as written.
A life insurance trust uses the same format when an individual buys life insurance: instead of naming an individual’s children as their beneficiaries on the policy, they should name the trust and trustee as beneficiaries. Therefore, if the individual passes away, the trustee will manage the life insurance policy according to the terms of the trust.
Should Individuals Name Their Children as Beneficiaries on Their Life Insurance Policy?
Many individuals wonder why they should not just name their children as beneficiaries on their life insurance policy. However, when this is the case, there often is more red tape to cut through. If a person passes away while their children are still minors, the life insurance company cannot pay out the benefits until a guardian is appointed. Unfortunately, this can take a long time and cost a lot of money. If they do not have a trust set up, people worry about their children receiving a large sum of assets – from a life insurance policy – when they turn 18 years old. Trusts provide more flexibility, allowing parents to set some ground rules about how the assets can be spent.
What Types of Life Insurance Trusts Are There?
There are two types of life insurance trusts: revocable or irrevocable. A revocable change can be altered – or ended – during an individual’s lifetime. On the other hand, an irrevocable trust cannot be changed. For most individuals, a revocable trust is a more popular choice. Wealthy individuals tend to use irrevocable trusts to protect their heirs from estate taxes. This is because property in an irrevocable trust is not counted as part of an estate for tax purposes. It is also important to note that in 2019, federal estate taxes were only applied to estates worth more than $11.4 million per individual or $22.8 million per couple.
Because there are different types of life insurance trusts, interested parents should consult an experienced estate planning attorney to create the perfect life insurance trust for their family.
Can I Benefit from Consulting an Estate Planning Attorney?
If you or a loved one wants to add a life insurance trust to your estate plan, contact the Houston estate planning attorneys at McCulloch & Miller, PLLC. Our lawyers have decades of experience handling a wide variety of estate planning matters and are prepared to answer any questions you may have. We help clients from all backgrounds and of varying net worth prepare estate planning documents to meet their unique needs. To schedule a consultation, call us today at 713-333-8900.