When you buy a life insurance policy, you get to pick a beneficiary. Most people will pick a direct descendent, such as naming their firstborn child as the beneficiary for the plan. In some cases, parents will name multiple siblings as beneficiaries.
But you also have the option to set up a trust as the beneficiary. When you pass away, the life insurance policy pays out into the trust. Why would you decide to do this?
The beneficiary is a minor
For one thing, the beneficiary may be a minor. This could mean that they can’t inherit or you may want to delay when they have access to the money. Putting it in the trust means that you can stipulate how the money is distributed and used. The trust could then pay for their college education, for instance.
It won’t be taxed
Another potential benefit is that this can keep the life insurance policy from counting toward your taxable estate. If you are concerned about the amount of taxes that will have to be paid or if you’re trying to reduce the value of your estate under a certain threshold, this may be one way that you can do it.
Protection from creditors
Finally, putting the money in a trust can help to protect it from creditors. For instance, maybe your child has a significant amount of debt. If they are given the money directly, creditors may have a right to it. But if the money is stored in a trust and your child does not technically own it, that protects the funds from this process.
As you can see, complex estate planning gives you options to accomplish your goals. Be sure you know what steps to take.