Should Life Insurance Beneficiary Be a Trust?

No matter what your situation is and what your financial goals are, you should think about whether or not to name a trust as the receiver of your life insurance policy. You should carefully weigh the pros and cons before making a choice. Both pros and cons should be thought about.

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Why naming a trust as the beneficiary of your life insurance policy is a good idea

If you name a trust as the beneficiary of your life insurance coverage, there are a few possible benefits.

Stay away from probate.

Probate is the formal process of giving a dead person’s property to their heirs after they die. The process can take a long time and cost a lot of money. It is also often open to the public. You can avoid probate if you name a trust as the beneficiary of your life insurance policy. The money from the policy will be sent straight to the trust as you direct.

Keep valuables safe from debtors.

If your beneficiary owes money to other people, the money from your life insurance could be taken away to pay those bills. But if the trust is written correctly, the money from the life insurance may be safe from creditors.

Take care of young children.

If you have kids who are still young, you can use a trust to handle their property until they turn 18. In this way, you can help make sure that they handle their gift well and use the money to help themselves.

You can decide how your belongings are shared.

When you name a trust as the beneficiary of your life insurance policy, you can tell the company how to give the money to your recipients. This can include giving each beneficiary a specific amount of money and setting conditions for getting the money, like hitting a certain age or meeting educational or career goals.

Not so good things about naming a trust as the beneficiary of your life insurance policy

Before choosing a trust as the beneficiary of your life insurance policy, you should also think about some possible downsides.

Cost: It can be pricey to set up and keep up a trust. It might cost money to manage the trust, like attorney fees, director fees, and other things.
Complexity: Trust agreements can be hard to understand, so you should have a lawyer look them over before you sign them.
No longer in charge: If you give your life insurance policy to a trust, you will no longer be in charge of it directly. If you want to change anything about the insurance, like who gets the money or how much it covers, you will have to work with the trustee.
Limited access to funds: The trustee may be able to choose how and when the recipients receive the money from the life insurance policy. This means that the people who are supposed to get the money might not be able to get it right away.

When you might want to name a trust as the beneficiary of your life insurance policy

There are some times when it might be a good idea to name a trust as the receiver of your life insurance policy:

If you leave behind a big enough estate to be taxed. In 2023, each person can leave $12.92 million without having to pay federal estate taxes. Your heirs may have to pay estate taxes if your wealth is worth more than this amount. If you name a trust as the receiver of your life insurance policy, you may not have to pay as much or any estate tax.
If you have kids who are young. If you have kids who are still young, you can use a trust to handle their property until they turn 18. In this way, you can help make sure that they handle their gift well and use the money to help themselves.
If you have people who need extra help. For someone who has a disability or a mental illness and needs special care, a trust can be used to handle their property in a way that makes sure they keep getting the help and benefits they need.
You can decide how your assets are shared if you want to. If you want to be in charge of how your assets are given to your beneficiaries after you die, you might want to name a trust as the recipient of your life insurance policy.

Different Kinds of Trusts

There are a lot of different kinds of trusts, but here are some of the most popular ones that are used as life insurance beneficiaries:

Revocable living trusts: The person who sets up the trust, called the owner, can change or cancel these trusts at any time. A lot of people use them to avoid inheritance and leave money to children under 18 or people with special needs.
Irrevocable life insurance trusts (ILITs): These trusts are irrevocable, meaning that they cannot be changed or revoked once they are created. They are often used to get rid of or lower estate taxes.
Special needs trusts: These trusts are made to help people who have special needs, like a disability or a mental illness. They can help make sure that the person who inherits the money keeps getting the perks and services they need, even if they get a lot of money.

What happens to your taxes if you name a trust as the beneficiary of your life insurance policy?

If you name a trust as the receiver of your life insurance policy, the tax effects will depend on the type of trust and the state where you live. In general, though, the following tax rules are in place:

When a person sets up a revocable living trust, the money from the life insurance policy will be taxed as part of their estate if they die within three years of moving the policy to the trust.
With an irrevocable life insurance trust (ILIT), the death benefit money will not be counted as part of the grantor’s estate for federal estate tax reasons, no matter when the grantor dies.
For special needs trusts, the life insurance money won’t be counted as part of the beneficiary’s estate for federal estate tax reasons, as long as the trust is written correctly.

Keep in mind that each state has its own estate tax rules, so you should talk to an estate planning lawyer in your state to find out what the tax consequences are of choosing a trust as the beneficiary of your life insurance policy.

Extra Things to Think About

When choosing if to name a trust as the beneficiary of your life insurance policy, here are some other things to think about:

Your family situation: If you have a complicated family, like a mixed family or kids with special needs, a trust can help make sure that your assets are split fairly and that your beneficiaries are taken care of.
Your financial goals: If you have a lot of money and assets, you might want to name a trust as the receiver of your life insurance policy to lower or get rid of estate taxes.
How much risk you are willing to take: If you are worried that your beneficiaries will misuse the money from your life insurance, a trust can help protect the money and make sure it is used for their benefit.

Some ideas on how to pick a trustee

When picking a trustee, think about these things:

Integrity: The guardian should be a person you can trust to be honest.
Experience: The trustee should know how to handle funds and make financial choices.
Know-How: The trustee should know about trust law and estate planning.
Ability to be reached: The trustee should be able to handle the trust and meet with the beneficiaries regularly.

You could also name a co-trustee or a trustee who will take over if the first one dies. This can help make sure that the trust is still handled correctly if the original trustee dies or becomes unable to do so.

In Conclusion

By naming a trust as the beneficiary of your life insurance policy, you may be able to escape probate, keep your assets safe from creditors, take care of your children, and decide how your assets are distributed after you die. However, you should carefully weigh the pros and cons of this choice and talk to an estate planning lawyer to figure out what is best for your unique situation.

Here are some more things you should think about before making your choice:

How much it costs to set up and run a trust.
How hard the trust deal is to understand.
The chance that you will lose control of your life insurance plan.
The needs of the people you help.
Your plans for estate planning.

If you want to make a trust the beneficiary of your life insurance policy, you should talk to an estate planning lawyer first. They can help you figure out what the pros and cons of this choice are and set up a trust that works for you.

Frequently Asked Questions

Q: If I have life insurance, how do I make a trust the beneficiary?

A: You will need to change the beneficiary title on your life insurance policy in order to name a trust as the beneficiary. To do this, call your insurance business and ask for a form to change the beneficiary.

Q: What happens to the money from the life insurance if the trust isn’t written correctly?

A: The life insurance money might not be safe from creditors or estate taxes if the trust is not written correctly. For another thing, the money might not be given to the people the way you asked.

Q: If I name a trust as the receiver of my life insurance policy, can I change that?

Yes, you can change your mind about who gets your life insurance at any time. You will need to get permission from the owner before making any changes if the trust can’t be changed.

Q: What do you think the costs are for setting up and keeping up a trust?

A: Setting up and maintaining a trust will cost different amounts of money, based on how complicated the trust is and how much the trustee charges. You can expect to pay around a hundred dollars to set up a simple trust and around a thousand dollars a year to keep it going.

Q: Before choosing a trust as the beneficiary of my life insurance policy, should I talk to an estate planning lawyer?

A: Yes, you should talk to an estate planning lawyer before choosing a trust as the beneficiary of your life insurance policy. You can get help from a lawyer to set up a trust that fits your needs and makes sure that the money from your life insurance goes to the people you want it to.

Q: When you buy life insurance, you can name a trust as the receiver. What other options are there?

A: Instead of naming a trust as the beneficiary of a life insurance contract, you could name one of the following:

This is the most popular way to name beneficiaries, and it’s a good choice if you have minor children or beneficiaries with special needs.
Adding a charity as a beneficiary: You can add a charity as a beneficiary on your life insurance policy if you want to give the money from your death to a charity.
Putting a custodial account as a beneficiary: A custodial account is a type of bank account used to hold money for children who are not yet adults. If you choose a custodial account as the beneficiary of your life insurance policy, the money will be put into the account and will be handled by a custodian until the child turns 18.

Q: What are some mistakes people often make when they name a trust as the receiver of a life insurance policy?

A: Here are some mistakes people often make when choosing a trust as the beneficiary of a life insurance policy:

Not writing the trust agreement correctly: Before you sign the trust agreement, you should have an estate planning lawyer look it over to make sure it is written correctly and meets your needs.
Not making changes to the beneficiary designation on the life insurance policy: After setting up a trust, you need to make changes to the beneficiary designation on your life insurance policy so that the trust is now the beneficiary.
Not picking the right trustee: You should pick a trustee who you can trust, who has experience, who knows what they’re doing, and who is approachable.
Not putting money into the trust: After setting up a trust, you need to put money into it by moving assets. The trust won’t be able to do its job if it doesn’t have money.
Failure to talk to your beneficiaries: You should talk to your beneficiaries about your trust and how you want your assets to be distributed after you die.

Q: Are there things I can do to make sure my trust is handled correctly after I die?

A: You can make sure that your trust is handled correctly after you die by:

Pick a trustworthy trustee. When picking a trustee, think about the things we talked about above, like availability, experience, knowledge, and reliability. You could also name a co-trustee or a trustee who will take over if the first one dies.
Make a trust agreement that is clear and to the point. In the trust agreement, you should say exactly how you want your assets to be divided after you die. The trustee should also be given advice on how to handle the trust’s assets.
Give enough money to the trust: The trust should have enough assets to support the recipients and reach its goals.
Have a conversation with your beneficiaries. You should tell your beneficiaries about your trust and how you want your assets to be spread after you die. In the event of your death, this will help keep things clear and peaceful.

Q: How do I set up a trust?

To set up a trust, you will need to:

Pick a donor. The trustee will be in charge of managing the trust’s funds and giving them to the beneficiaries as you tell them to. Pick someone you can trust, who has a lot of experience, and who knows a lot about trust law.
Make an agreement of trust. The trust agreement is a formal document that spells out the trust’s terms, such as the trustee’s duties and powers, the beneficiaries’ rights, and how the trust’s assets should be given out. Before you sign the trust agreement, you should have a lawyer look it over.
Give money to the trust. After making a trust deal, you need to put money into the trust by giving it assets. This can be money, stocks, bonds, real estate, or other assets.
Give the trust ownership of the life insurance claim. Once the trust has enough money, you will need to give the life insurance policy to the trust. If you want to do this, call your insurance company and ask for a change of ownership form.

Q: Should the life insurance money go to? A: Spouse or trust?

As the beneficiary of your life insurance policy, you should name either your partner or a trust. This will depend on your personal situation and financial goals. When making your choice, here are some things to think about:

Spouse

The most popular choice is to name your spouse as the beneficiary of your life insurance policy. It’s an easy and clear way to make sure that your spouse gets the money from your policy when you die. There are a number of benefits to naming your partner as the beneficiary, such as:

Making your partner the beneficiary of your life insurance policy is a simple and easy thing to do. Usually, all you have to do is fill out a change of beneficiary form from your insurance company.
Tax advantages: The money from a life insurance policy is usually not taxed by the federal government, it doesn’t matter who the receiver is. If you name your partner as the beneficiary, on the other hand, you do not have to pay federal estate tax on the money.
You have the most say over how the money from your life insurance is spent if you name your partner as the beneficiary. You can tell your partner how much money they should get and how they should spend it.

Trust

If you name a trust as the beneficiary of your life insurance policy instead of your partner, there are some extra benefits, such as:

Protecting assets: A trust can help keep the money from a life insurance policy safe from lawsuits, creditors, and other people who could take it away from you.
In addition to the federal income tax exemption, a trust can also help lower or get rid of estate taxes on the money from a life insurance policy.
Flexibility: A trust can give you more choices about how to share the money from your life insurance. For instance, you can use a trust to take care of young children, people with special needs, or to spread out the money over time.

However, there are some problems with making a trust the receiver of your life insurance policy. These are some of them:

Cost: It can be pricey to set up and keep up a trust. It might cost money to manage the trust, like attorney fees, director fees, and other things.
Complexity: Trust agreements can be hard to understand, so you should have a lawyer look them over before you sign them.
No longer in charge: If you give your life insurance policy to a trust, you will no longer be in charge of it directly. If you want to change anything about the insurance, like who gets the money or how much it covers, you will have to work with the trustee.

Who you name as the beneficiary of your life insurance coverage is, in the end, aa personal choice. There is no right or wrong answer. The best choice for you will rely on your personal situation and financial goals.