As a new parent in Missouri, you have probably already considered purchasing a life insurance policy to provide for your child in the event that you die while he or she is still a minor. However, you may have limited control over how your child receives the payout. At Hamra Law Firm, LLC, we often help parents to maximize the benefits of a life insurance policy for their children.
Zacks Investment Research explains that a life insurance trust may be just the solution you are looking for. Not only does this estate planning tool allow you to dictate how the policy proceeds will be allocated for your child, it also helps you to avoid taxes if you meet the following requirements:
- Create an irrevocable trust
- Designate a trustee (it cannot be you)
- Make the trust the beneficiary of the policy
- List your instructions for the trustee regarding how to distribute the trust assets after your death
The government does not look favorably on those who empty their estates on their deathbeds in order to avoid estate taxes. Therefore, you must live at least three years past the transfer of the policy to the trust. Otherwise, the IRS has the right to tax the death benefits in the trust.
This may not seem fair. After all, sudden fatal accidents happen every day. Fortunately, there is a way to sidestep the three-year look-back rule:
- Set up the trust
- Appoint the trustee
- Have the trustee purchase the policy in the name of the trust
- Designate the trust as the beneficiary
After the policy is purchased, it is a good idea for you to fund the trust with the money to pay the premiums and have your trustee make the payments. More information about ways to protect your child’s inheritance is available on our webpage.