Why can’t I just have my child own a life insurance policy on my life rather than setting up an irrevocable life insurance trust?

At first glance, the concept may sound simple enough: to prevent the proceeds from a life insurance policy from being included in your estate, name someone else as the owner. In many cases, the best choice for the new owner of the policy is an irrevocable life insurance trust.

Establishing a Trust May Be the Best Choice

Clients who opt to use direct ownership as a way to keep insurance policy proceeds out of their estates often name their beneficiaries as the new owner. For example, if you have two children, you may decide to name them as the new owners of the policy. Often, however, a trust would be preferable, for the following reasons:

  1. One child may die prior to your death. If that should happen, the proceeds may be distributed in a manner that is not how you intended.
  2. If a child has unpaid liabilities, it is possible that the life insurance policy can be attached and liquidated by his creditors.
  3. If your child divorces, the policy may be considered an asset during the divorce proceedings. This may affect the division of the remaining assets between the ex-spouses. It may also be contrary to your intent, as you may not have intended for your in-law to have any right or interest in the asset.
  4. One of your children may refuse to pay the premiums. If that happens, the policy could lapse. In the alternative, the other child may have to foot the bill.
  5. One of your children may decide to borrow against the cash value of the policy. Again, this may not have been your intent. If your child owns the policy, however, you have no authority to prevent this borrowing from occurring.
  6. Unlike setting up an irrevocable life insurance trust, changing ownership of the policy does not allow you to plan for children who are minors or grandchildren.

Life insurance policies are no different from other assets, such as your family home in Anaheim or your two cars, when it comes to the need for creating an estate plan. How this particular asset is handled, however, will depend on the unique facts and circumstances surrounding your estate. It is important to discuss all of your options with an experienced and knowledgeable estate planning attorney. We have helped countless clients create estate plans that work well for their families, and we can do the same for you. Take a look at our client testimonials page to learn more!