Have you considered buying an expensive course about life insurance to find out whether you should set up a trust as your life insurance beneficiary? Don’t waste your money. Here’s the lowdown.
Trusts sound like fancy money tools for rich people, but they’re not. They don’t have to be complicated, and anyone can set up a basic one. In fact, most people do not need complex trusts to fulfill their estate planning needs.
What’s a Trust?
A trust document is a contract that transfers the ownership assets from the owner (trustor) to a beneficiary (new owner).
A trustee is the person who has control over the asset distribution to the beneficiary.
Typically, the trustee is a relative or fiduciary for the beneficiary, but the trustee and beneficiary are permitted to be the same person.
Doesn’t a Living Will Do That?
You might think a living will transfers property, but it’s not as bulletproof as a trust.
When a will is opened and an estate is settled, it goes to the probate court, where a judge oversees the process. Probate is the legal procedure of validating the will, counting assets, paying debts and taxes, and distributing what’s left.
Anyone can dispute the will, and the process can take months to conclude, sometimes years. It’s also expensive.
Plus, the downside is that you have to die before a will takes effect. That’s not the case with a trust.
Who Needs Trusts?
Trusts are for everyone who wants to pass assets or property to someone else without going through a court where a judge makes a decision.
- Parents with minor children who can’t legally own property.
- Unmarried and LGBTQIA+ individuals who want to transfer property to a partner without family members disputing it.
- Parents or family members who want to financially provide for a special needs minor or adult child.
- Business owners who want to transfer business ownership.
- Someone concerned about a stroke, dementia, or Alzheimer’s affecting their ability to pay for their care.
- People needing to protect assets (such as a home) from creditors, taxes, or welfare benefit qualifications.
- People who want to transfer wealth under conditions to a financially irresponsible beneficiary.
- Anyone who wants to transfer property privately, outside of probate.
What Can You Put in a Trust?
Trusts are very flexible. They can hold ownership of the following:
- Real estate
- Bank accounts and safe deposit boxes
- Stocks, bonds, mutual funds, ETFs, cryptocurrency, and other investment assets
- Insurance policies
- Tangible personal property (like jewelry or your grandmother’s silver)
- Limited liability companies
Types of Trusts
There are two essential types of trusts: revocable and irrevocable.
A revocable trust’s assets remain in the trustor’s control and can be changed or dissolved at any time.
However, once an asset goes into an irrevocable trust, the trustor no longer owns or controls it.
How Trusts Help Life Insurance Planning
Because minor children cannot own property, they should not be named as life insurance beneficiaries. Instead, you would use a trust to help you leave money for your children.
Suppose you are a single parent with two children, both under 18, and buy a $500,000 term life insurance policy.
You could set up a revocable trust naming both children as equal beneficiaries and a trusted family member or friend as the trustee.
Then, you’d name the revocable trust as your life insurance beneficiary. That way, if you died tomorrow, the trust would automatically become irrevocable, and the life insurance policy would pay death benefits to the trust.
Then the trustee would follow your guide on how or when money should be distributed to the children.
Naming a Guardian Instead of a Trust as Beneficiary May Not Work
Suppose you name your sister as guardian for your children if you and your spouse died simultaneously. In addition, you name her as the life insurance beneficiary to use for the children because you can’t leave it to your children directly.
Consequently, she would receive the life insurance death benefits free and clear of any obligation to use that money for your children.
With a trust, you can name your children’s guardian (or any other adult) as a trustee. They would be obligated to use that money only for the beneficiaries, not themselves.
Regardless of how much you trust someone, you can’t assume their good intentions when a huge check comes in their name. A trust removes any question.
Most Families Have Revocable Trusts for Life Insurance
Often, families have revocable trusts benefitting minors and special needs family members because they aren’t funded until a trustor dies. Then, it triggers life insurance or financial account funding.
Many families also have trusts set up to protect their homes. If a homeowner needs to qualify for Medicaid, having part or all of the house owned by the trust means the state can’t force you to liquidate it, thus becoming homeless.
Finally, if you want to leave life insurance funds for someone who is a poor money manager, a trust makes it much easier to control the stream of money.
The trust simplifies putting conditions on when funds become available to a spendthrift beneficiary. For example, you might want them to receive $2,000 per month or a lump sum on their 30th and 40th birthdays.
Should a Trust Be Primary or Contingent Beneficiary?
The answer will depend on your unique situation. For example, suppose you are a single parent. In that case, you could name the trust as the primary beneficiary if you want to leave the death benefit for your minor children.
If you are a married spouse, you probably want to name your spouse as primary and trust as contingent.
However, single people without children can name anyone they want, including a parent, sibling, friend, trust, or charity. For example, suppose you intend to leave money for a parent’s health care to take care of them. In that case, the trust can be the primary beneficiary.
Is a UTMA Beneficiary Better Than a Trust?
UTMA (Uniform Transfer to Minors Account) is just an account in the child’s name with the custodian’s name.
When the child turns 18, the account automatically transfers to them, and they have control over 100% of the funds. By contrast, a trust controls how much, when, and how the beneficiary receives funds.
With a nominal amount of money, a UTMA is better than naming a minor as a beneficiary. But unfortunately, UTMAs are considered the child’s asset and can affect their financial aid applications.
Thus, UTMAs are better for active saving than life insurance beneficiary designations. However, when you’re talking about large sums of money, a trust is a more cautious and precise way to handle your affairs.
Takeaways
- Trusts help your estate skip probate and directly benefit your loved one.
- Trusts provide the most control over what happens to your assets.
- Trusts don’t have to be complicated or expensive.
- When you set up a trust, ensure you have a complete estate planning kit, including a living will, advance directives, and power of attorney documents.
- Talk with an estate planning attorney to determine if a trust is right for you.
This post was written by Fiverr writer Am7creative, we hire Fiverr writers who are proficient in the topics they write about. This way we can all learn more. For another post on life insurance read Am7creative’s other post The Terrible Idea of Using Life Insurance as a Bank Account.
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