Funding your trust with life insurance

| Oct 9, 2020 | Estate planning |

There are many considerations that come to mind when planning your estate, not the least of which is how and what to leave behind for loved ones and minor children should you no longer be there. Many people decide to set up a trust as a means of having more control over how assets are to be distributed, not to mention to avoid a lengthy probate and taxes.

Beyond creating a will and a power of attorney, some people explore the benefits that a trust can provide. Rather than funding the trust only with assets such as stocks, bonds and cash, a person creating the trust funds it through life insurance. Wisconsin has become an attractive state for the administration of trusts since the adoption of the Wisconsin Trust Code in 2013.

Different kinds of trusts

A trust is a fiduciary arrangement formalized in a document that allows one party, the grantor, to permit another party, the trustee, to manage and make decisions about the allocation of the funds placed in the trust, often on behalf of named beneficiaries.

Two of the most common types of trusts are revocable and irrevocable. Each one offers different advantages in terms of flexibility or to shield the estate from inheritance and income taxes. In Wisconsin, a trust is revocable unless it expressly states that it is irrevocable. Even irrevocable trusts can be changed out of court under the WTC, although with limitations. Such trusts are complex and can require the help of a attorney to set up.

Life insurance and your trust

Parents who fund a trust with life insurance usually name each other as primary beneficiaries, with the trust as the contingent beneficiary. This is more advantageous than simply naming minor children on a policy, because they won’t be able to access the funds until the age of majority.

By funding a trust in this way, if the parents die, the funds become immediately liquid, tax-free and available for the trustee to access on behalf of the minor children. It is important to ensure that the named beneficiaries are clear in the trust, however.

One of the least expensive types of insurance is term life insurance. Parents who have not accumulated substantial assets can purchase a policy that lasts until their children are adults and out of college. Some people, however, prefer a policy that provides a longer period of funding, such as guaranteed universal life insurance.

There are many options in estate planning, but it is important to find the one that best suits your circumstances and life.