What Is A Florida Life Insurance Trust, And Do You Need One?
Michael and Abigail have three young children under 10 and know it’s time to purchase a life insurance policy. However they are bewildered by the process because Abigail has a pre-existing condition and is in cancer remission. They are concerned they might not qualify for coverage, and even so, what happens to the policy in the event both spouses pass simultaneously?
Situations Where a Life Insurance Trust is Helpful
These are adequate concerns. Simply put, life insurance does not cover every what-if situation. In fact, there are several caveats making it difficult to get money in the right hands when it is badly needed. For example, if a couple gets married and one spouse purchases life insurance, they will make their surviving spouse the beneficiary in the event of their death. But if both spouses die within the same time period (which has occurred throughout the country with COVID-19 cases), the minor or adult children do not become automatic beneficiaries of the plan. Rather the life insurance plan benefits must go through probate before they are assigned to the children. Many people also forget to update their life insurance beneficiary plan after a divorce or major change in their lives, further complicating matters.
What is a Life Insurance Trust?
An irrevocable Life Insurance Trust is created specifically so that the trust becomes the beneficiary of life insurance benefits. The grantor assigns future beneficiaries of the trust contents and a trustee to manage the account. So, when the grantor passes away, life insurance benefits are paid from the insurer directly into the trust, and then distributions are made to beneficiaries based on the grantor’s instructions. This circumvents red tape regarding life insurance applications (including inability to name a minor child as a beneficiary) instead putting discretion in the hands of the trustee. The grantor can indicate when drafting the trust that benefits for a minor should be paid directly to a guardian(if named) or pooled into a trust for the benefit of the minor, or perhaps at a specific milestone (such as when the child turns 18).
However, the trust must be irrevocable (meaning it cannot be altered once created during the grantor’s lifetime) in order for it to be effective. Also, transferring an existing life insurance policy may incur taxes including gift tax liability. Because of this, it is often easier to cancel an existing policy and purchase a new one, or prepare a trust simultaneously.
Contact Our Legacy Planning Attorneys at Strategic Counsel Law Group, L.C.
If you or a loved one is considering the purchase of life insurance, there is no time like today. Rates will only increase as you age. However life insurance alone is often only one piece of the estate planning puzzle. Forming a life insurance trust can ensure your loved ones are adequately protected. Our Tampa estate planning attorneys at Strategic Counsel Law Group have experience in legacy planning and working with our clients to find customized solutions to meet their needs.
