There are a number of estate planning funding sources. For example, death benefits received from a life insurance policy can often be considerable. These benefits can then either be paid directly to beneficiaries or can be placed in a trust and distributed to a beneficiary at a later date. 

The following will review some of the reasons to consider funding a trust with benefits from a life insurance policy. 

Using Trusts for Benefits is More Advantageous

Some people decide to name an individual and an alternative to receive benefits from a life insurance policy, but it is often a wiser idea to name a trust as a beneficiary. 

In many cases, there are limitations placed on naming a secondary alternative death beneficiary who receives benefits if the first named party does not survive the policy holder. Instead, placing life insurance benefits in a trust that contains instructions for a trustee on how the amount should be distributed is often a much more preferable option. 

This is because trusts can be drafted in such a way to protect a beneficiary who would spend assets unwisely if they directly received them. Furthermore, trusts can also be used to protect assets from creditors. 

Inadequate Funding can be Avoided

Using death benefits from a life insurance policy is often an excellent option to make sure that a trust has adequate funding. If a trust is not adequately funded, it is likely that assets placed in the trust will have to be sold at unfavorable prices. 

To avoid inadequate funding of trusts, a trustee can also be authorized to make distributions in a certain manner that is articulated by the trust creator or settlor’s instructions. This way, the trust’s creator can make sure that money is not spent in a way that the settlor does not approve. 

Placing Benefits in a Trust Avoids Taxes

The generation skipping transfer tax places a tax of approximately 40% on both gifts and transfers in trusts either to or for the benefit of unrelated individuals who are more than 37.5 years younger than the trust’s creator. These taxes are also placed on individuals who are more than one generation younger than the donor. 

By placing assets in a trust rather than directly distributing them to beneficiaries, it is sometimes possible to avoid the generation skipping tax as well as other types of taxes. 

For example, when it comes to deciding what to do with benefits from a life insurance policy, naming a trust as the beneficiary can be particularly advantageous because there are no income taxes placed on the amount. Not to mention, using an irrevocable trust to retain the assets can be an advantageous method of minimizing federal estate taxes

Speak With an Experienced Estate Planning Lawyer

While they might not be the best solution for all situations, trusts can play a powerful role for some estate plans. To create the best estate plan possible, it is often a wise idea to retain the assistance of an experienced estate planning lawyer. 

Contact experienced estate planning lawyer Jim A Lyon today to schedule a free consultation.