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Why to consider a life insurance trust

When you bought your life insurance policy, it was with your children in mind. You wanted to be sure that they would have their needs met, even if you and your income were gone. You didn't want a car accident or some other sudden tragedy to leave them with nothing.

Now, one option that you have is to set them up as the beneficiaries when you buy the policy. This way, the insurance company just pays them the money upon your passing.

For adult children, this may work. For minors, though, there can be snags. The insurance company isn't going to pay a $500,000 policy to a 10-year-old. If there's no other parent, a guardian has to be legally appointed by the court. This can cost money and take time, keeping that money from your kids.

As such, you may want to consider creating a life insurance trust in advance. Essentially, this lets you pick the person who will be in charge of that money by setting him or her up as the custodian.

Instead of sending the money to the kids, the insurance company sends it to the trust, in the care of that custodian. The trust can then have rules for how it is to be used -- paying for medical care or school costs, for example -- that the custodian will follow. This way, your children get the benefits of that financial support without directly getting the money. You ensure that they're cared for in the same way they would be if you were alive.

Trusts are very flexible and useful in many situations, and it's critical for parents to know how to use them when doing their estate planning.

Source: Nerd Wallet, "How and Why to Set Up a Life Insurance Trust for Your Children," Barbara Marquand, accessed May 04, 2017

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