Life insurance policies are agreements made between a person and an insurance company. When the insurance policy owner dies, the persons designated as beneficiaries of the policy receive a death benefit from the company.
Is it possible to fund a Florida trust with a life insurance policy? Keep reading to find out.
How to Fund a Florida Trust with Life Insurance – Understanding the Basics
In a Florida trust, a trustee (fiduciary) holds title to the assets of the trust maker (referred to as “trustor” or “settlor”) held in the trust, which is managed for the benefit of one or multiple designated beneficiaries.
While it is possible to designate a co-trustee, it is not the ideal approach in most cases. Funding a trust refers to the act of transferring the title of assets to the legal arrangement. Depending on the trustor’s purpose, one may fund a trust using different assets like:
- Real property
- Bank accounts
- Safe deposit boxes
- Investments (e.g., stocks, bonds, mutual funds, etc.)
- Notes payable
- Membership interests in business (e.g., ownership shares in a corporation)
Many Florida residents fund trusts with life insurance policies. After the trustor’s death, the beneficiaries of the trust receive the proceeds of the policy.
The main benefit of holding death benefits within a trust is the superior control over the resources and how funds are used. This strategy is often used by parents who have minor children. To determine whether to purchase a life insurance policy to fund a Florida trust, potential buyers must consider:
- The amount of coverage needed
- The amount paid for premiums
- Whether to opt for a term life policy or a permanent life policy
- The different life insurance quotes for distinct policy options
What is the Best Trust Option for Life Insurance Policy Owners in Florida?
It is possible to transfer a life insurance policy to revocable or irrevocable trusts. Revocable trusts offer more flexibility to the parties involved in the arrangement, as they can be modified, amended, or even revoked during the trustor’s lifetime.
Irrevocable trusts have stricter requirements. Once signed into existence, it is not possible to modify or amend a revocable trust without court intervention. If the trustor transfers a life insurance policy to an irrevocable trust, it is no longer possible to change its ownership.
Depending on the trustor’s purpose, both options have advantages and disadvantages. For tax purposes, irrevocable trusts offer more reliability. If the trustor wants to retain control over the assets or have a choice if things do not go as expected, revocable trusts offer more flexibility.
Setting up a trust requires attention to the tax liability aspect. While Florida has no income tax, trust owners may still be subject to federal taxes. Florida trusts also involve the payment of maintenance fees.
If the trustor’s main purpose is to avoid probate, transferring a life insurance policy to a revocable trust offers a flexible solution. Other specific options include special needs trusts and testamentary trusts. Consult with an expert attorney to find a tailored solution for your case.