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Planning ahead with a trust

On Behalf of | Jun 18, 2021 | Estate Planning |

When Floridians make plans to provide for their loved ones after they are gone, it is estate planning that ensures that their wishes will be realized. After basic documents such as a will, a financial power of attorney and a living will are drawn up, some people may also choose to set up a trust.

Depending on what type it is, a trust can offer tax benefits as well as provide individuals with more control over how assets are distributed. People may fund this estate management tool in many different ways, not only with assets such as cash, stocks and bonds, but also with life insurance.

Recent changes to the Florida Trust Code have made the Sunshine State one of the friendlier states for trust administration. However, before moving forward, it is beneficial to first review estate plan options with experienced legal counsel serving the Fort Lauderdale community.

Life insurance and trusts

Trusts fall into two basic categories, revocable and irrevocable trusts. Although irrevocable trusts have better tax advantages, revocable trusts offer a greater level of flexibility and access. It is important to check on how both federal and state inheritance taxes affect varying tiers of wealth when establishing a trust.

As revocable trusts do not go through probate, assets may be accessed sooner than they would be through a will. The grantor can also more easily make changes to this type of trust, including funding sources.

For young families that have not yet accumulated the substantial assets necessary to plan ahead for their children, it is possible to set up a trust and fund it with life insurance. This way, in the unlikely event that both parents were to pass away unexpectedly, the life insurance would pay out to the trust, and the designated trustee would then manage the affairs on behalf of the children. A term life insurance with a policy that will go until the children are out of college is relatively inexpensive and cost-effective.

Advantages of life insurance policies in estate planning

Although married couples typically name each other as primary beneficiaries when they purchase individual life insurance policies, funding a trust with term life insurance makes more sense for parents with young children, providing liquidity and avoiding the tax burdens or challenges of other funding sources such as investment accounts or real estate equity.

The payout to a trust will also be tax-free and immediately available, whereas if the children were the beneficiaries of the policies, the funds would not be accessible until they reached the age of majority. It is important, though, to make sure the beneficiary designations of the trust are clear.



Photo of Jennifer D. Sharpe