Funding is the key to ensuring your Living Trust works for you and your family. Most people who have trust have life insurance. How do you make sure that life insurance proceeds are protected for your family? You make sure that your life insurance is funded properly. Let’s talk about this a bit more.
What kinds of insurance are we talking about? Any life insurance you have.
This would mean life insurance you bought from a broker. Life insurance you bought outright through an employer, maybe one you no longer even work for. Life insurance you get as a group benefit of your current employment. Life insurance you have because your spouse has the option to get you the benefit through their employer.
The key to most life insurance and living trust situations is that you are not going to change the ownership of the policy from YOU to YOUR TRUST. There are situations where this may make sense, but 99.9% of folks who do estate planning are not doing estate planning with these types of policies and trusts. Those types of trusts are commonly referred to as ILITs. This isn’t the type of trust we are referring to in this article. We are talking about revocable living trusts and we are talking about an overall net worth and estate that doesn’t require sophisticated tax planning. And, again, the massively overwhelming amount of people that are doing estate planning do not need any tax planning at all.
So how do you “fund your life insurance” if you are not changing policy ownership to your trust?
You change the beneficiary of your life insurance from a person to the trust. So you point the proceeds, at death, to the trust.
Let’s talk about a few things unique to life insurance.
- Life Insurance proceeds will likely be calculated into the overall size of your estate. This is really only important for those persons who will have large estates when they pass away. Again, most persons are not in this category and need to focus on other aspects of life insurance.
- Life Insurance is generally protected from creditors. Which means that when the policies pays out, the people you owed money to in your lifetime do not get to go after it to pay that debt.
- Life Insurance shouldn’t be “owned” by a trust unless you have very solid and specific reasons to do so (and you have worked with a knowledgeable attorney, advisor and accountant to set this up).
- Life Insurance can be paid out to a trust. Again, make sure you are doing it in coordination with an attorney who knows how to draft the trust and help you ensure the proceeds go to the trust.
When we talk to clients about life insurance, we see a few things:
- Most people forget they have it and forget the impact on the size of the estate they are leaving behind.
- Most people still want their spouse to receive the life insurance proceeds directly, not through the trust.
- Most people have named their kids, even kids under 18, to be the beneficiaries of policies (maybe as secondary).
We get it, life insurance seems straight forward. Just name the beneficiary you want and it will be fine. Unless you have named a person who is under 18 years old or a person who is incapacitated. Then it isn’t going to be at all. Make sure that you have thought through who you want to be named to receive the proceeds. Your trust can receive the proceeds and be named as the beneficiary. Talk to your estate planning attorney about how your life insurance fits into your overall goal and estate plan. Talk to them about how you should designate that policy.
This article isn’t intended to give you specific legal advise. Always seeks the advise of an attorney/law firm in your community with your unique questions and circumstances.