Nesting: Life Insurance Trusts

Last Updated Aug 20, 2009 3:44 PM EDT

This is the sixth blog entry in the Nesting series.
I've finally completed a task I started nearly four years ago: I set up a life insurance trust. Don't ask me why it took quite so long. I have no valid excuse. But now that it's behind me, I urge other parents to consider one too.

I'll admit that setting up a trust isn't nearly as fun as selecting a new crib or registering for baby gear. But that doesn't mean it isn't helpful. If you are buying (or already have) a life insurance policy with proceeds that could trigger the federal estate tax, an irrevocable life insurance trust can protect it from getting hit by Uncle Sam.

This isn't really an issue if a policy is meant just for a spouse. Your husband or wife won't have to pay taxes on the death benefit. But if something should happen to both of you, or if the money doesn't get spent before the original beneficiary passes on, the proceeds will then get hit with the estate tax unless a trust is in place.

There is one catch that may bother you. Once the life insurance is in a trust, you no longer own it. The trust does. That means that should you and your spouse get divorced, you can't change the beneficiary. For some people, this is a deal breaker. But for my husband and me, we've decided that the proceeds are really meant to help our children. So whether we're still together or can't stand being in the same room as each other, we both feel very confident that we'll want our kids to have enough money for a comfortable childhood and a college education.

Now for the hassle factor. We first needed a trust document drafted by our lawyer (which we had done nearly four years ago) and an Employer Identification Number (EIN) from the IRS. For some reason, we found the EIN form very confusing to fill out and needed to call our attorney for help. But once we started to use the online form, the task got much easier.

We then had to "fund" the trust and open up a new bank account for it. While this wasn't exactly difficult, it was time consuming since the bank we went to didn't set these up often. Now we just need to make sure we stay on top of some paper work and always pay the premiums out of the trust. All in, this took us about a week to complete and we are now ready to buy our life insurance.

In the meantime, if I was really organized, I would start the process of transferring our other life insurance policies into the trust. I sure hope we get around to it before another four years pass.

Do you have a life insurance trust? Will you consider one now that you know it could protect the proceeds from estate taxes?

For More Nesting Blog Posts:
Nesting: Buying Life Insurance
Nesting: Time to Buy BPA Free Baby Bottles
Nesting: Considering a Move to Save Money
Nesting: 10 Tasks for Second Time Parents
Nesting: My Pregnancy and Health Insurance Headaches

Nursery 7383 image by abardwell, CC 2.0.