Many people associate trusts with the wealthy. They assume that people must have enough liquid capital to set aside tens of thousands of dollars or more as trust funding.
For those creating a trust for specific purposes, such as special needs trusts for the support of a vulnerable family member, insufficient funding can be a serious concern. People hoping to establish a trust to provide for their loved ones after their passing can potentially use life insurance to help fund the trust if they do not have enough assets to ensure adequate funding otherwise.
The trust can be the policy beneficiary
Trusts can assume ownership of financial accounts, real estate and businesses. For people without enough resources to provide ongoing support for dependent family members, using a life insurance payout to fund the trust is a reasonable solution.
A trust can provide structure for the use of those resources, ensuring that surviving family members have support when paying for medical bills, enrolling in college or incurring other expenses included in trust documents.
The person establishing the trust must file beneficiary designation paperwork with their life insurance company if they want their policy payout to serve as trust funding. They may also need to discuss limitations on distributions with an attorney to prevent scenarios in which their loved ones might lose benefits or face tax complications due to large trust distributions.
Life insurance is a helpful tool for those who cannot fully fund a trust with their current resources. Exploring different solutions for funding a trust with an estate planning professional can help people create a meaningful legacy and protect their loved ones.