Should Your Life Insurance Policy Be Written In Trust?
The purpose of a life insurance policy is to provide financial assistance in the event of a death. The beneficiaries of the policy are usually the insured's children while, if there is no designated beneficiary alive at a certain time, then it will usually follow that person with unclaimed assets. Simply put: life insurance provides for these types of ‘what-if’ situations by providing financial benefits to those you leave behind after your death.
However, if you find that your family and friends don’t exactly agree on who should be receiving those monies because they all have their own ideas about who should be left out, then trust funds might not be the best option for you. Even if they can agree on who gets the money, an unintended outcome for them might be that they become dependent on your income because of this.
But are there other reasons why you shouldn't write your life insurance policy in trust? Here are six of them:
1. What is a trust fund?
2. What is the purpose of a trust fund?
3. Who can be a beneficiary of my life insurance policy if it's written in trust?
4. Can I have any control over my life insurance policy when it's written in trust by naming myself as the trustee?
5. What happens if I become mentally incapacitated?
6. Can I be held liable if my named trustee is deceased or becomes incapable of acting as my trustee?
What is a trust fund?
A trust fund is much like a savings account in that it's set up to accumulate money over time for a specific purpose, just like a savings account would do. However, while the money can be withdrawn from your trust fund at any time, it takes on an added layer of protection for it to qualify as a type of trust. This means that the trustee of your trust can't withdraw funds unless the beneficiary receives their inheritance first and then makes whatever purchases he or she wants with it.
Trust funds are also referred to as inter vivos trusts, which means that it is established by a living individual. This, in turn, gives the trustee more flexibility when it comes to how the trust should be managed. The trust can also be changed whenever the trustee sees fit to do so.
What is the purpose of a trust fund?
The primary purposes for writing your life insurance policy in trust are so that there's more flexibility with how you manage your estate and the people who should be receiving what when you're gone. Your intentions are reduced to black and white while taking advantage of all of the legal benefits and protections that writing a life insurance policy into a trust account has to offer.
Who can be a beneficiary of my life insurance policy?
Having your policy written into a trust account allows you to manage the trust in the way that you see fit. You can also name anybody who satisfies any of the following criteria as a beneficiary of your life insurance policy:
The person(s) whom you want to receive your death benefit when you're gone. If there's no designated beneficiary or if they disagree with one another, then it usually follows that they'll get to share equally with each other. The person(s) whom you wish to take care of should there be no designated beneficiary or if they disagree with one another, then it usually follows that they'll split everything up equally among each another. Both spouses provided they are not already named as co-trustees for a prior trust. If there's no designated beneficiary or if the person who receives your death benefit has to divide it with another person, then it usually follows that the money will be split up between them equally. Both parents provided they are not already named as co-trustees for a prior trust. If the parents don't feel comfortable naming themselves as co-trustees of a prior trust, then you can always name other family members instead.
What happens if I become mentally incapacitated?
If you wrote your life insurance policy in trust and become mentally incapacitated, then your assets will revert back to your beneficiaries while you're physically capable of making financial decisions. Ideally, when you become mentally incapacitated from a stroke or Alzheimer's, your beneficiaries can take over the management of your estate. This will allow them to maintain control over any assets that you've left behind while they treat you as having entered into a living trust.
What happens if I become mentally incapacitated?
If you named yourself as the trustee for your life insurance policy and become mentally incapacitated, then your beneficiaries can take over the management of any funds that were left behind after monitoring how much money has been added to it and what's been taken out of it. How will your beneficiaries know what's been taken out of your trust? You'll have to leave them with a schedule that details this information.
If I lost the money in my trust fund, could I be held responsible?
If you named yourself as the trustee for your life insurance policy and became mentally incapacitated, then your beneficiaries can receive compensation from any funds that were left behind after you become incapacitated. They can pursue the trustee for any amount that was taken out of the trust fund or stolen.