How To Set Up A Life Insurance Trust For Your Child

By Author: Monica Quinn
Total Articles: 67
Comment this article

The safety and well-being of their children is vital for parents, and most individuals obtain life insurance to cover their mortgage, education, and other expenses so that their family may continue after they die.

While your intentions may be noble, designating a juvenile as a life insurance beneficiary might lead to serious issues because life insurance policies cannot be paid out to minors. It is preferable to create trust for your child and identify the trust as the beneficiary of your life insurance.

Trusts aren't exclusively for wealthy people. They are, however, an excellent estate planning instrument for transferring property, assets, and life insurance proceeds. Trusts also help to avoid probate issues.

Problems with naming a minor as your life insurance beneficiary
Minor children cannot receive the proceeds of a life insurance policy directly. Instead, if you haven't appointed a legal guardian, the state will, which is a time-consuming and costly process. That guardian would then decide how the money is managed and spent, which may or may not be in accordance with your intentions.

If ...
... you are a single parent, consider whether you want the non-custodial parent identified as the court-appointed guardian of your child's life insurance benefits. What if you've been divorced? Do you want your child's guardian to be a stepparent?

A trust eliminates this dilemma since it specifies how the trustee will administer assets for the benefit of your kid, including whether money should be provided to the guardian.

Pros and cons of establishing a trust
A trust is a more sophisticated arrangement that gives you more say over how your assets are spent.

Most people who set up a trust for their children do not give them complete authority until they are 25 years old. The trustee of a trust can pay for your child's schooling and living expenses. You can have the trustee pay the guardian a monthly allowance. Instead of allowing your child full access to the trust money, you might have the trust administer a monthly stipend to them when they reach adulthood.

Although it is more expensive to establish a trust, it allows you more control over how the money is spent and when your child has access to them.

A trust can manage the health, education, and support of your children
The advantage of trust is that you may be as specific as you wish. When establishing trust for a child, you should consider HEMS (health, education, maintenance, and support). A trust is adaptable; you can amend it when your wants or circumstances change.

A trust is preferable to a UTMA account since UTMA distributes funds as soon as the child turns 18 or 21 years old, depending on your state. According to Pietrangelo, most 18 and 21-year-olds lack the capacity to manage a lump-sum cash gift.

You can address health issues and special needs dependents in a trust
Parents should create healthcare directives for their children not only in the event that one or both parents die but also in everyday situations. Parents should prepare paperwork, a sort of fill-in-the-blank medical release so that if the parents are traveling without the children, the grandparents or babysitter can assist in obtaining medical care for the child. This is useful in divorce cases where there are uncertainties about who makes choices for the child if they are hurt.

Special needs dependents cannot have money in their names, or the money will be taken by the government.

In this case, a "special needs trust" is required. A special needs trust differs from a conventional children's trust in that a special needs dependent often requires care for the rest of their life and is unlikely to be self-sufficient.

Selecting a trustee
The most difficult aspect of forming a trust is selecting a trustee. The trustee can be an individual, a bank or financial organization, a sibling, or a third party. Some parents name themselves as trustees and appoint backup trustees in the event that they die.

Pietrangelo added that you should choose someone who is competent with accounting and finances because being a trustee entails a lot of paperwork. Some people name their bank, legal company, or accountant as trustees; however, a financial advisor cannot serve as a trustee.

If you want your family to be able to have quiet holiday dinners, an outside trustee who is a neutral party may be preferable. In this manner, siblings can be upset with the trustee rather than a relative.

Greetings, my name is Monica. I graduated from New York Medical College and work as a nurse in Queens Hospital at the moment. The thing I love the most is morning jogging, because it is a wonderful way to keep myself in tonus. I like to communicate with people who care about their health. I became a vegetarian five years ago. Now my daily menu consists mainly of vegetables, fruits and different cheeses. I am a member of water polo team and I love gardening. I like to see how huge flowers grow out of the tiny petal, it dazzles me because I love spending my time outdoors. My goal is to visit all the USA parks, and then all over the world)