Richard and Jane now have two children and have named Richard’s brother as guardian should a need arise. Richard has recently quit his job and has founded a construction company. As part of the founding of the construction company, Richard has been required to personally guarantee $1.6 million of loans to fund the company’s construction projects. The personal guarantee will require Richard to pay back the $1.6 million if the company is unable to cover the loan.
Richard has purchased a 20 year term life insurance policy that will pay a $2 million death benefit to support his family. Richard originally had the policy set up to pay the money to his estate on his death, and to be distributed based on the provisions of his will. Richard has recently established a revocable living trust to receive the proceeds of the life insurance. The revocable living trust is an entity completely separate from Richard, and as such will not be responsible for Richard’s debts. Had the $2 million policy been paid to Richard’s estate, the creditor from the construction company could have a claim against the proceeds, potentially leaving Jane with only $400,000 to provide care for their family. The use of a revocable trust can protect proceeds of life insurance from creditor claims. An additional benefit of a revocable trust is that it avoids probate. If David transfers his house to the trust by deed, his wife will automatically have title to the property on his death.
The benefits of a revocable living trust are great, but it can be complicated to establish such a trust. It is recommended to seek the services of an estate planning attorney who can ensure all the protections allowed from a revocable living trust.