Life Insurance

Establishing a Life Insurance Trust

how to set up a trust for life insurance
Setting up a trust for life insurance allows you to name a beneficiary who may not be able to legally control their finances at the time of your death, like a child. Alternatively, an insurance trust also lets you set limitations on how and when the beneficiary may take distributions.

Learn more about life insurance trusts, what setting up a trust for life insurance entails, and the benefits of doing so.

What is a life insurance trust?

If you understand life insurance basics, you know that your beneficiary receives the policy’s death benefit once you pass away. But what happens if you’re worried about the age, maturity, or capacity of the person you choose as your beneficiary? In this scenario, it may be worth setting up a trust for  life insurance.

A life insurance trust allows you to set specific terms as to how the life insurance death benefit may be used. This is especially helpful in two cases: 

  • Leaving a minor child as a beneficiary 
  • Leaving assets to your child (minor or adult) with disabilities who may not be able to manage their finances on their own 

If you simply leave an inheritance to your minor child, their appointed guardian will be responsible for how that money is used. Perhaps the guardian would be an ex-spouse or someone who loves your kids, but might not have the best financial mindset. By setting up a trust for life insurance, it ensures that your specific wishes are met. For example, you might prefer that the funds are earmarked for college tuition, a wedding, or to put a down payment on a future home.

What is an ILIT? 

An irrevocable life insurance trust (ILIT) is a smart estate planning tool to use for your death benefit. You cannot change the terms of this type of trust once it is finalized, including the beneficiary. But once you’re sure of how you want the trust to work, it’s the most ironclad option for reaping all of the benefits that come with putting your life insurance in a trust.

Benefits of a life insurance trust

Why put life insurance in a trust? There are several advantages to using a trust instead of simply letting the life insurance company disburse funds directly to your beneficiary. 

You get to control how the life insurance funds are distributed. Are you worried that inheriting a lump sum of cash at a young age could end up having a negative impact on your child? If so, you can do what many people do, which is to set an age limit, such as 25 years old, before a beneficiary can start taking distributions. Another option is to create an annual distribution to control how much can be taken out at a time.

You can reduce estate taxes. Leaving money through an ILIT helps to avoid estate taxes. In fact, the funds can even be used to pay estate taxes, pay off the grantor’s debt, or take care of their final expenses.

You can allow your heirs to avoid probate. Leaving any life insurance policy behind for a loved one is a good move for avoiding probate. First, the probate process can take several months before an estate is settled. Additionally, those proceedings are made public. Keeping life insurance benefits in a trust make it easier to keep an inheritance private and fast-moving.

It can help beneficiaries keep government benefits. If your life insurance beneficiary receives disability or other government benefits, then an ILIT can help them remain eligible to keep collecting. Your estate attorney or financial planner can help create a distribution strategy in such a way that it doesn’t disqualify them in the same way a major lump sum might.

How to set up a trust for life insurance

You might think it’s complicated to set up a life insurance trust, but it’s actually a straightforward process. Follow these four steps for setting up a trust for life insurance according to your wishes.

  1. Work with an estate attorney. The good news is that you don’t have to figure out how to put life insurance in a trust on your own. Hiring an experienced estate attorney to set up your trust will ensure that it’s done legally and that all of your wishes are expressed in a way that reflects your true intention. This is especially important when creating an irrevocable life insurance trust, since you can’t make changes once it’s finalized.
  2. Choose a trustee. A trustee is the individual or organization that is responsible for executing the ILIT after you pass away. They will handle any relevant taxes as well as the distribution schedule for your beneficiary. 
  3. Select a life insurance trust beneficiary. Before opening a trust, manage your beneficiaries to make sure your policy is up to date with your most recent wishes. This is an important decision since it can’t be changed once the irrevocable trust is in place.
  4. Provide your financial professionals with copies of the trust. Your estate attorney, accountant, and financial planner should all have copies of your trust. They’ll often work together since their roles often overlap to create the most tax-advantaged financial strategy on behalf of you and, eventually, your beneficiary. 

Is a life insurance trust right for you?

Now that you know how to set up a life insurance trust, the question is should you? Determining whether a life insurance trust is right for you depends on various factors, including your financial situation, estate planning goals, and personal preferences. 

But before you can even think of setting up a trust for life insurance, you’ll have to get life insurance. Get started with a customized life insurance quote from Ethos today.

Get a quote
Nicotine Use?
Explore your options

The estimated monthly rate for this policy is:

Coverage amount
Term length
10 years
Please note that all prices quoted are subject to change, including due to underwriting.