You bought life insurance to protect your children, but you are not finished yet. Probate courts will not issue large life insurance checks to minors. So where does that money go until your children become adults? How will their guardian afford to care for them?
A living trust solves these problems. Plus, they’re easy to set up. You can either have an estate attorney prepare one for you or do it yourself through LegalZoom.
Disclaimer: We cannot provide legal advice. This is our understanding only, and you should consult with an attorney to confirm the best arrangement for your situation. Larger estates may require different types of trusts or strategies.
Transferring your life insurance policy to your living trust can prevent the money that should go toward raising your children from getting held up in the court system. Probate takes time, money, and creates a lot of stress for the executor.
Since life insurance companies will not pay out a policy to a minor, the benefits go to your estate. It could be years before your estate is settled and your child’s guardian sees a penny.
What is a Living Trust?
A living trust is an entity which owns and manages assets under the direction of the trustee (usually you.) The grantor (also you) transfers assets into the trust.
Because trusts cannot die, probate does not apply to them. When the trustee passes on, the trust distributes the assets as directed. It skips probate, avoiding time, publicity, and legal fees.
What is Probate?
Whenever a person passes on their Last Will and Testament goes to the probate court where the court will divide their assets and make sure any debts are paid.
Probate holds on to any assets to make sure creditors are paid. This costs the estate money for court fees and attorney fees.
What is the Worst Case Scenario Without a Living Trust?
Without a living trust, if both parents die, then the life insurance money will end up in probate. Judges will not give a large life insurance check to a minor. The money stays in probate until the children come of age or the court decides the best course of action for it. This depends on your state laws. Even if you name your minor children as beneficiaries on the life insurance policy, they will not be handed a check.
This means that the life insurance which was supposed to help pay for someone to raise your children can stay in limbo until they reach 18. During this time the amount from the life insurance gets smaller and smaller from court fees and attorney fees chipping away at it.
How Does a Living Trust Protect Your Children?
Living trusts don’t go into probate. When you name your trust as a beneficiary of your life insurance policy, then the money will go into the trust instead of into probate. That means the court and attorney fees don't apply.
It also means that the life insurance benefits can be distributed in any way you see fit. Although this should be specifically stated in the trust.
In most cases, this allows the designated guardian to use the some of money in order to care for the children until they either reach adulthood or finish college. How you structure the trust is between you and your attorney. You can pick any age you think appropriate for your children to receive life insurance money from the trust, as long as it's 18 or older.
For Families with High Net Worth
Once an individual’s net worth hits $5.45 million, their estate owes the Federal government estate taxes. These estate taxes can take a large chunk out of the total value. However, you can minimize this through legal estate planning strategies. Again, we are not attorneys. Please consult an estate attorney for appropriate advice for your circumstances.
Many high net worth families create irrevocable life insurance trusts. This type of trust can own property like a living trust but is controlled by a third party instead of the grantor. This separates anything in the trust from the grantor and their estate when they pass.
The irrevocable life insurance trust owns a life insurance policy and manages it through premium financing strategies. In short, the trust receives the life insurance benefits upon the passing of the grantor/insured person. This reduces the size of the estate and can save up to 95% of estate taxes.
How to Set Up a Living Trust
The best way to ensure the trust protects your children is to work with an experienced trust and estate attorney. They can tailor the living trust to your needs and confirm everything is properly in place.
Before you meet with your attorney, you will need a list of all your assets as well as the paperwork for those assets. Your attorney can advise you what to put into the trust. Many families put everything into the trust including their home and vehicles. The trust can also own real estate investments, stocks, and physical items like Grandmother’s china.
If you choose to DIY your living trust, you can use a service like LegalZoom to complete all the paperwork. They have a few levels of service to make this more or less comprehensive, depending on your needs.
You also need to name a legal guardian for your children if you haven’t already. The trust will help the guardian financially support your children if you pass away before they’re grown.
Living Trust Frequently Asked Questions
Living trusts are extremely customizable, which also means they can be tricky to understand. The following are several of the most common questions we get when setting up life insurance to pay out to a living trust.
How are assets distributed from a living trust?
The successor trustee (the people who take over when you pass on or become incapacitated) becomes the owner of the trust. They can do all of the same things that you can do, including moving assets in and out of the trust.
Most likely you will leave a set of instructions on how everything is to be divided. Your successor trustee can follow your instructions and distribute their assets. They are also allowed to take a cut (pay themselves) from the assets in the trust. Make sure you select a successor trustee (or trustees) that you trust to do the right thing because they don’t necessarily have to follow your instructions.
Does a Living Trust Avoid Estate Taxes?
Not entirely. Although it can help. Federal estate taxes don’t kick in unless your estate is worth more than $11.4 million. State estate taxes will vary. If you are looking for strategies to minimize estate taxes, talk to an estate planning attorney.
Do I need an attorney to create a living trust?
No. You can do it yourself. See the section above on how to set up a living trust.
With that established, it can be wise to enlist the help of an attorney. If you think your spouse or heirs might challenge the trust or have a large estate, we recommend it.
Does a living trust eliminate the need for a will?
Not entirely. You will still need a Pour Over Will. It’s a will that functions as a catch-all for anything you haven’t transferred into the trust. This can be included with your trust if you use a service like Legalzoom.
Your Pour Over Will also names a legal guardian for minor children, so they aren’t left to the mercy of the courts.
Can a will be listed as my beneficiary on my life insurance policy?
No. A will cannot be your beneficiary. That is why a trust should be created and listed as your beneficiary on your life insurance policy. If you don't have minor children, you may not need one. However, you should check with an estate attorney to confirm the right strategy for your situation.
Will I ever need to update my living trust?
If you have a major life event after the creation of your trust, you will need to update it to reflect your new situation. For example, if you have another child, divorce, or remarry, then updating your trust protects the people you want to care for in your updated circumstances.
If you invest in real estate, you also might want to use your trust to buy and sell the property. That way nothing gets stuck in probate if you forget to move it into your trust.
Will a living trust shield my assets from creditors?
No. Your creditors can still challenge the trust and go after the assets within. The assets within the trust are still yours through the trust, so they’re subject to your debts. Otherwise, everyone would create trusts and be technically broke, and then creditors would never get repaid.
Does everyone need a living trust?
It doesn’t make sense for every family to create a living trust. It’s like life insurance in that if you have dependents or assets to protect, it can be wise.
If you don’t have children or much property, and you’re fairly young, then it may not make sense for you to go through the trouble of setting up and managing a living trust. However, if you have children or significant assets, then creating a living trust can save hassle and offer peace of mind.
How does a trust work with my life insurance policy?
The usual setup for a life insurance policy is to name your spouse as the primary beneficiary. Then name the trust as the contingent beneficiary. That way the life insurance benefit will be paid to your spouse.
If something happens to both you and your spouse, then the money goes to the trust. A guardian is appointed to use the money to take care of your children.
If you are not married, a family member or trusted relative/friend could be the primary beneficiary. Then the trust is contingent. Or, the trust can be the primary beneficiary, but you will still need to appoint a guardian.
If you have a complicated estate or have legal questions, seek the advice of a competent attorney.
To best protect minor children, set up a living trust and name the trust as the beneficiary of a life insurance policy. With a Pour Over Will naming a guardian for your child, the successor trustee can immediately distribute the life insurance payout in accordance with your instructions.
How Abrams Insurance Solutions Can Help
We have partnered with LegalZoom if you want to create your own trust and have it be your beneficiary. As independent life insurance agents, we can help you find the right life insurance policy to protect your children through your living trust. We also strongly advise parents to name a trust as beneficiary of their life insurance. This will avoid children suffering financially while the life insurance check gets held in probate for possibly years.
If you have any questions about living trusts and life insurance, give us a call at (888) 905-0333. We are happy to help, and there is never any obligation to buy.
Disclosure: We have partnered with LegalZoom because we believe in their quality of service. If you click through some of the links and purchase services from LegalZoom, we will receive a commission. This does not add any cost to you.