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Why would I want to set up a trust?

On Behalf of | Jun 3, 2022 | Estate Planning |

When couples in New York and elsewhere decide to start a family, life becomes too hectic to plan too far ahead. It’s only when one parent must travel for work, or if both are away for a weekend trip, that the quiet concern at having to leave their babies at home with a caregiver begins to surface.

Thinking about creating an estate plan does not solidify for couples until they have children and realize that they may not always be there to protect them. Although many people tend to put off estate planning for later, over half of Americans have no estate plan at all. This can create unnecessary risk for young children who will need guardianship and financial support if their parents are no longer there.

How do you fund a trust?

Parents may want to name a guardian in the first stages of estate planning. They usually have not amassed enough wealth to even think about who would inherit what assets, or what funds they could use to create a trust. A trust is essentially a legal instrument that authorizes a designated trustee to manage assets on behalf of another party, called the beneficiary.

Many people do not realize that it is possible to fund a trust with life insurance. Young families may not yet have substantial assets to put aside for later, but they can purchase a policy that will ensure the children’s financial future should they pass away.

In a two-parent household, each parent may purchase a policy and name the other as the primary beneficiary with a revocable living trust as the contingent beneficiary. Term life insurance is one of the most affordable and can continue until the children are out of college. If both parents pass away unexpectedly, the policy pays out to the trust, and the designated trustee manages the trust assets on behalf of the children.

What are the advantages of setting up a trust?

Life insurance policies do not have the tax implications of investments, nor do they have the equity of real estate that can be difficult to access. Some other advantages to funding a trust with life insurance include:

  • Term life insurance is tax-free and liquid immediately after death.
  • Naming children as beneficiaries of the trust gives parents more flexibility to allocate funds according to their specific needs.
  • Life insurance creates wealth in the event of the policy owner’s death.

New York trust laws provide for the creation of several different types of trusts, but they must conform to the creation requirements according to state law. For residents of the Five Boroughs and Suffolk County, it is never too early to explore their estate planning options.