Many parents who do not have wealth or assets to spare purchase life insurance policies to prepare for the worst-case scenario where they do not live to raise their children. This proactive step along with a will is a good start, but it does have its downsides due to court delays and a lack of control over the spending of the funds.
Forbes explains that transferring the life insurance policy to a trust can correct those issues.
If minor children are the beneficiaries of the life insurance policy, then they cannot receive the payouts until they have a guardian. Even if the parents named a guardian in a will and no one contests the decision, obtaining the court’s official approval is still a part of the probate process that takes time.
When a trust is the beneficiary of the policy, the payout is immediate, and the trustee can begin managing the funds for the children right away. The trustee could be the guardian, or the parents could name a financial institution, a professional or a friend or family member they trust to manage their children’s finances until they are mature enough to receive the final distribution.
Trusts allow people to set specific instructions on how the trustee and beneficiaries can use the funds. So, parents may allot a certain amount for each child’s college expenses, designate how much the children receive monthly for allowance and make other directives as they see fit. In this, they are able to essentially continue sharing their values with their children as well as providing them with support.
Other estate planning tools and trusts may complement a life insurance-funded trust depending on the needs of the children and the resources of the family.