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FUNDING A TRUST WITH LIFE INSURANCE: HOW MUCH IS ENOUGH?

If you want the benefits of a trust for your heirs and yourself but you feel like you don't have enough assets to warrant creating such a legal arrangement, then you might want to consider the merits of life insurance. Did you know that you can fund a trust with a life insurance policy?

While there are obviously some legal and financial complexities involved that you might want to work through with an estate law attorney, the basics are as follows. You create a legal trust. You place a life insurance policy within the trust -- meaning the trust is the beneficiary of the life insurance policy should it pay out. If you pass away, the life insurance policy pays out, funding the trust you set up.

So, how much life insurance should you purchase for this purpose? It really depends on what you want the trust to do. If you want a trust to fund your child's college education, you should estimate how much that education is going to cost and purchase that much or more in life insurance. If you want to provide a trust to pay for medical and other care required by a special needs dependent, then you might work with medical providers to understand what types of care would be required throughout that person's lifetime and estimate the costs for that care.

Life insurance is a great way to pad your estate or help cover some needs of those you left behind, but don't make the mistake of relying on it completely. Life insurance is simply one tool in the estate planning bucket, and it works best when coupled with strong planning and well-written estate documents.

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