Funding a Trust With a Life Insurance Policy

Parents who are older and have amassed or inherited some wealth are likely to put money in trust for their children and grandchildren. The good news is that parents who are younger and do not have much in the way of assets can set up a trust for their children, too.

According to Forbes, the way they can do this without their own assets to fund the trust is through a life insurance trust.

The Basics of aTrust

A trust is an entity that can own assets. “Funding a trust” means transferring ownership of assets to the trust. Then, the trustors name a trustee to manage the assets according to their instructions. The trustors also name beneficiaries and designate how they should receive the assets. For example, the instructions may state that the trustee invests funds in a certain way and pays an amount of the interest from the investments to the beneficiaries each month.

This is advantageous for parents who want their children to have a regular and sufficient income until they are old enough to handle a lump sum payment.

Life Insurance Policies

To fund the trust with life insurance policies, the parents must first fund the trust with the money to purchase the policies and make the payments. The trust is the owner of the policies, and it is the beneficiary, as well. If the parents die, the policy pays out to the trust, and the money becomes immediately available for the trustee to use for the benefit of the child.

The life insurance trust is just one estate planning tool that parents may use regardless of their current financial status.