Some of our clients are young parents. Often times as they start out in life they have a small home or condominium and a large mortgage to go with it. They have not yet had time to accumulate a large pool of assets. But most have life insurance in place to create an instant estate in case they die. The insurance can be used to pay down debt (like a mortgage) and to provide a pool of money to pay ongoing lifestyle expenses, educational expenses or for other legitimate reasons.
Often, these clients ask whether they should use a living trust, even though life insurance is their only major asset.
Most think the answer is no when in fact it may more correctly be yes. Here is why.
A life insurance policy will pass to a designated beneficiary without going through the probate process. However, if you have minor children who are the beneficiaries of that life insurance policy, the life insurance company will generally not distribute those policy proceeds to a minor.
Instead, someone usually has to go to court and set up a guardianship on behalf of that minor. If you fail to plan properly, you may end up with a guardian appointed by the court, and that guardian may be someone you would rather not have controlling that minor’s money.
Once the guardianship is set up, the court will often try to protect the money in a closed account that can only be accessed by court order. Whenever that minor needs that money for things like braces or medical care or education, the Guardian must petition the court to access the money.
Additionally, there is a cost for ongoing attorney’s fees and court costs. Then when the minor reaches the age of majority (18 in most states), the law goes to the other extreme. The money is then given outright to the minor with no instructions and no control.
When you have a living trust, you can name the trust as the beneficiary of the insurance policy. The trustee, someone that you choose, then uses the money to provide for the beneficiaries of the trust according to your instructions. No guardianship or court intervention is required. And if there is money left over when the child turns eighteen it can be released to the child or held in trust to pay for things like college, weddings, and other things that you deem important, all as per your wishes and instructions.
In most cases, a living trust will be the best way to plan for your minor children. It also will serve as a great foundational estate planning vehicle as you start to build your other estate assets.
As in all planning around important issues such as these, it is best to work with experienced advisors who can help you think through these issues.