Who should own the insurance on your adult kids? It depends who you want controlling the policy and cash value of it. If you want to give control of your policy to your kids (to access the cash value) then have your kids own it. If you want control, have the trust own it with you as the trustee.
Tip: Set up a $3,000,000 insurance policy in the trust, with a $20,000 premium/year per child ($1 million on the life of each child, the large premium allows for you to have a growing investment component within the policy). The trust flows out $20,000/year to each of the adult children who then pay the $20,000/year premium.
Did You Know That Your Life Insurance Can Create A Trust?
An insurance trust allows for control and timing of insurance proceeds to be distributed to minors, or to fund a testamentary trust.
Not only will this reduce probate fees/delay and taxes, but it can protect your beneficiaries from creditor claims. If there is a disabled beneficiary it can flow money to them and not have their government benefits clawed back. This is how the Rockefellers and other affluent families stayed rich.
It can be set up in one of three ways:
- Through a separate trust agreement, to receive the proceeds of the insurance when the insured dies.
- Through an insurance trust clause in a will.
- Through a trust clause in an insurance policy, naming the trust as beneficiary, instead of a person.
An insurance trust is a good idea for someone who is in a blended family, and there is not enough in the estate to leave money for the new spouse and for the children of their previous marriage. The insurance goes into a trust that names the minor children as beneficiaries. Make sure the trustee has the children’s best interests in mind. Without this, if you die before your spouse, you may have elected to have your spouse as your beneficiary to take care of them once you are gone. But your children from your previous marriage may be short changed because you died first. Your surviving spouse can take the proceeds of your estate and then they can will it to their children from a previous marriage, or the handsome pool boy, or the cute babysitter.
Tip: If the beneficiary is a minor, you need to elect a trustee for the policy on the application form. This allows the trustee to use the money for the benefit of the child beneficiary until the child turns 18.
Many times trusts are not cost effective. There may be two reasons for this. First, the annual cost for the accountant to file the tax return and ongoing legal costs to sustain the trust, and second, if the children decide to wind up the trust shortly after the death of their parents because they want their money out or don’t want to be tied to the trust or each other.
Beware. You need to ensure your trusts are set up properly, if not, they may not legally defer the time your children will get their gift. You don’t want them to get it all at 18 simply because the trust wasn’t properly constructed. There are many ways a trust can be voided by not putting it together properly . . . don’t get tackled on the one-yard line.
The material I have presented is meant to be a general stepping stone or starting point. It is intended to open up a further conversation with a professional to determine if trusts would be suitable for your specific situation. If you have further questions, reach out to me at Jessie@jessiechristo.com. I can bring in the specialists you need to provide tailor-made advice.
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