Do I Need a Living Trust if My Only Asset is a Life Insurance Policy?

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Learn about Living Trusts

Do I have to Create a Living Trust?

Living trusts are confusing if my only asset is a life insurance policy.

What is I name my minor child as the beneficiary, Should I create a living trust still?

How do I know if I need a living trust? Estate planning is all about ensuring your wishes are met after your death. All estate plans should include a will and powers of attorney. In many cases, a trust has additional benefits beyond what can be accomplished with the will and powers of attorney.

A trust is a legal entity in which one party, a trustee, holds legal title to assets which must be managed for the benefit of another party, the beneficiary. A living trust, also called an “inter vivos” trust, is simply a trust you create while you’re alive.

Trusts are often funded with a life insurance policy, which provides the assets that will be used after the death of the insured, for the benefit of their family or other heirs. Particularly for parents of minor children, the combination of life insurance and a trust may be the best way to ensure your children have their financial needs met, while also making sure the assets are used in ways you desire.

Living Trust with Life Insurance Policy

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. Plus, 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 then uses the money to provide for the beneficiaries of the trust according to your instructions. No guardianship or court intervention is required.