What is a trust — and can it be a life insurance beneficiary?
A trust is a legal entity that holds and manages assets for someone else’s benefit. When it comes to life insurance, you can designate a trust — instead of an individual — as your policy’s beneficiary. At your death, the payout goes into the trust and is distributed based on rules you set. Disclaimer: This is for informational purposes only and does not constitute legal or financial advice. Consult a licensed professional before making estate planning decisions.
Why some parents choose a trust over an individual
If you’re divorced, widowed, or a single parent, naming your child directly may not guarantee intended outcomes. Minors can’t legally receive insurance payouts, which may end up managed by a court-appointed guardian or the other parent. A trust gives you the ability to designate who manages the funds, how much is distributed, and when. You can structure payouts for living expenses, education, or delayed lump sums. Disclaimer: State laws governing minor beneficiaries and guardianship vary — consult an attorney.
Why high-net-worth individuals use trusts for insurance
For large estates, trusts can deliver tax advantages and confidentiality. An irrevocable life insurance trust (ILIT) can help minimize estate taxes by keeping the policy proceeds outside your taxable estate. Trusts also avoid probate, meaning distributions remain private rather than becoming public record via a will. Disclaimer: ILITs must follow specific IRS rules — improper setup could lead to tax consequences.
Pros and cons of naming a trust
Pros | Cons |
|---|---|
Ensures money is managed your way | Legal setup and maintenance costs |
Protects minors or dependents with special needs | Adds legal complexity |
Avoids probate and court involvement | May be unnecessary for small policies |
Can reduce estate taxes with an ILIT | Requires ongoing administration |
Disclaimer: Pros and cons will vary by individual situation. Consult an estate planner before deciding.
How to set up a trust for life insurance
To use a trust as your beneficiary, follow these steps:
Work with an estate attorney to draft your trust.
Choose between:
Revocable trust — can be updated or revoked during your lifetime.
Irrevocable Life Insurance Trust (ILIT) — permanent, but can offer tax benefits.
3. Name the trust as the beneficiary on your insurance policy.
4. Ensure the trustee understands their legal and fiduciary responsibilities.
When it does — and doesn’t — make sense
A trust may be right if you:
Have minor children or dependents with special needs
Want to prevent an ex-spouse or court from managing the beneficiary payout
Value privacy in estate transfers
Hold a large life insurance policy that may trigger estate taxes A trust may not fit if you:
Have a small policy or adult beneficiaries who can manage funds
Prefer a simpler, lower-cost approach
Disclaimer: Always consult with an estate planning attorney or tax professional before moving forward.
Bottom line
Naming a trust as your life insurance beneficiary gives you more control, privacy, and — if properly structured — tax relief. But it adds legal complexity and ongoing cost. It’s most useful for parents protecting inheritance or high-net-worth individuals managing their estates. Always consult an expert before proceeding.
