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A life insurance-funded trust can protect your children’s future

On Behalf of | Jun 9, 2021 | Estate Planning

Purchasing a life insurance policy to cover the expenses of your children’s upbringing if you die while they are small is a good idea. However, minors cannot directly receive the payout, so the money will not be available until the court establishes their guardian. Then, the guardian would manage the lump sum.

But what if the person you choose to raise your kids is not someone with money sense? Will he or she be able to make that payout last through the end of your children’s education and provide them with money to start their adult lives?

Funding a life insurance trust

If you prefer to be the one who decides how to spend the money on your children, Nerd Wallet explains that you may want to set up a trust and make it the beneficiary of the policy, instead of your children. A life insurance-funded trust is both the purchaser and the beneficiary of the policy.

To set this up, you fund the trust with the money to pay the premiums each year, and the policy payout funds the trust at your death. You also name the person, professional or institution that will serve as trustee and manage the funds.

Controlling the future of the payout

Although someone else still controls your children’s finances, the management and distribution occur according to the instructions that you provide. If you say, for example, that you want the trustee to invest the funds in such a way, and distribute them in certain amounts and intervals, then the trustee would only deviate from that if something happens that makes your instructions too risky.

You can also include instructions that require your children’s guardian to work closely with the trustee to manage their finances and make sure they always have what they need, from toothbrushes to college tuition.