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Finding ways to fund a trust

On Behalf of | Nov 22, 2021 | Uncategorized |

When people in Illinois and elsewhere think of estate planning, it is often something they would rather take care of when they are older. Especially for parents with minor children whose daily lives seem hectic enough, thinking that far ahead just doesn’t seem as important.

Even taking care of the most basic estate documents would be a good start, however. Not only does a will follow the directives of its creator regarding the distribution of assets, it also allows for the naming of a guardian for minor children should both parents no longer be there. At the time people set up a will, they will often also create a power of attorney.

Once these documents are in place, it may make sense for residents of Geneva and surrounding areas to explore the benefits of setting up a trust as well. A trust can provide individuals more control over how they may distribute assets later, and they may also be able to avoid costly and time-consuming probate issues. Individuals can fund the trust with stocks, bonds, and cash, but they can also fund it with life insurance.

Life insurance and the trust

Trusts may be either revocable or irrevocable. Irrevocable trusts have better tax advantages, but they are more difficult to access or alter. A revocable trust has more flexibility and access, and as it will not go through probate, the assets are more quickly accessible than they would be through a will.

Parents who may not yet have accumulated enough assets to fund a trust may consider purchasing a life insurance policy as an inexpensive means of ensuring the financial security of their minor children should something happen. In a two-parent household, each parent would purchase a policy and name each other as the primary beneficiary with a revocable trust as the contingent beneficiary.

How the policy pays out to the trust

Purchasing a term life insurance where the policy continues until the children are out of college is cost-effective, and should both parents pass away unexpectedly, the policies will pay out to the trust. Funding a trust with life insurance provides liquidity and avoids the tax burdens and challenges of other funding sources, such as investment accounts or real estate equity.

The payout to a trust is also tax-free and immediately available, whereas if the children were the beneficiaries of the policies, the funds would not be available to them until they reached the age of majority. The parents should designate a trustee to oversee the trust on behalf of the children, and make sure the beneficiary designations of the trust are clear.