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In most instances, life insurance companies won’t pay the death benefit of a life insurance policy to a minor until he or she turns 18 — unless a trustee or guardian has been named.

And in some states the children, or other inheritors, may have to deal with estate taxes after a death, while the assets could be tied up in probate court, rendering them unable to pay. Trusts ensure that life insurance money is distributed according to your wishes, without delay.

Trusts are inherently complicated instruments. That’s why they’re usually preferred by those who can afford a lawyer, and have a lot of assets to protect — from taxation, creditors and, sometimes, greedy relatives.

But understanding the basics is imperative for anyone who wants to ensure that their money and property go to their children. There are many pitfalls that come with a lack of knowledge.

Key Takeaways

  • Trusts are a viable instrument to ensure that life insurance money is distributed according to your wishes, without delay, if you have minor children .
  • Trusts protects money from taxation, creditors and, sometimes, greedy relatives.
  • A main benefit of life insurance trusts is that the proceeds avoid probate.
  • Two common types of trusts are revocable Living Trusts & irrevocable Life Insurance Trusts (ILITs)
  • Your household financial worth can help determine the best strategies for children’s trusts for your situation.

Benefits of life insurance trust

life insurance trusts

There are many benefits of a life insurance trust. One of the major advantages is that the proceeds of the life insurance policy avoid probate.

“When life insurance and other assets are placed in a trust, they bypass the often lengthy and burdensome probate process that ordinary wills are subjected to,” says Judith Tang, an attorney with Fennemore Craig.

That means you can designate beneficiaries to your policy and the money will go to loved ones without having to specify this in your will.

The terms of your life insurance trust supersede those of your will. In addition, you cannot use your will to change who will be the beneficiary of your life insurance trust.

Of course, the trust only controls assets that are placed within it. So, make sure to keep that in mind when planning your estate.

Also, a trustee has a big responsibility in managing the trust’s assets, including the cash from the life insurance policy that can be used to pay immediate expenses after death.

Many trustees have been sued, not only for mismanagement, but also for lack of management. One example is failing to invest the proceeds in the stock market. You may find that the trustee of your choice doesn’t want that responsibility.

If the court has to appoint a guardian, that person will likely take a more conservative approach of putting the money in a bank account because he or she doesn’t know your wishes. Therefore, a lawyer can be an immense help in creating specific instructions regarding the use of life insurance money.

Tang also mentions that if you have substantial wealth, a life insurance trust may help shield your beneficiaries from having to pay estate tax (or a portion of the estate tax), which helps to preserve family wealth across generations.

Two common types of trusts

The two most common life insurance trusts are Irrevocable Life Insurance Trusts (ILITs) and Revocable Living Trusts.

Revocable Living Trusts — “A revocable trust allows the settlor (trust creator) to make changes or even terminate the trust if the settlor wants to,” says Tang. They’re much easier to create and apply to more people than ILITs. For that reason, it’s critical that you name a beneficiary who you trust and know will follow through. Revocable trusts tend to be more common since there is more flexibility for the settlor to make changes to the trust and to the insurance policy, Tang adds.

Irrevocable Life Insurance Trusts (ILITs) — “An irrevocable trust doesn’t allow any changes from the settlor once it’s been set up. While irrevocable trusts limit control over your assets, that can actually be beneficial for those with substantial wealth because it may allow them to remove tax liabilities from their estate – if the settlor has a taxable or potential taxable estate. The irrevocable life insurance trust will be the owner and the beneficiary of the insurance policy and future insurance proceeds,” say Tang.

Special needs trusts

For children who may never be healthy or able to fend for themselves, you might want to set up a special needs trust. Again, you need to be careful and engage a lawyer.

Also, there’s the question of Social Security and taxes. You don’t want a disabled child to “look rich” if he or she could be eligible to collect Social Security disability benefits at the age of 18.

A disabled child can maintain eligibility for assistance because they don’t have control over the money in the trust. The trustee can use the funds to pay for a variety of things for the disabled child, such as education or vacations.

The trustee of a special needs trust should make sure that money from the trust isn’t used for food, clothing, shelter, medication or anything covered by Social Security.



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Inheritance tax exemption

For the wealthy, an irrevocable trust may be the answer. This type of trust takes a bunch of assets, often including a life insurance policy, and “tosses them over the compound wall,” says attorney McManus. In effect, you create a separate corporation to manage them.

An irrevocable trust is clearly a device to protect against taxation; many states and the federal government impose inheritance taxes when the estate exceeds a certain amount. The federal estate tax exemption is $11.4 million for 2019. You can find the most recent limits at

An irrevocable trust needs a lawyer’s support, because assets placed in this trust can’t be taken out, no matter how much your situation changes. You can, however, provide for changes in status when you create the original trust document, such as additional children, divorce, or a special needs child.

In some states, the assets inside the trust, such as a life insurance policy, can be “decanted” like a bottle of wine. They can’t be taken out of the trust, but they can be “poured” into a new trust that better meets the revised needs of the person who’s making it, suggests Barron’s magazine. For example, you could “buy” a life insurance policy from an old trust to put in a new one.

Best strategies for children’s trusts

The best strategies for setting up a trust for underage children depend on a household’s financial worth:

Families with less than $500,000 net worth — Parents would likely do best with a will, power of attorney or an advanced medical directive. Trusts are costly, and that cost likely doesn’t outweigh the benefit. Parents should purchase 10-12 times their annual income in level term life insurance. Whole life insurance isn’t necessary.

Families with net worth between $500,000 and $2 million — A will, power of attorney, an advanced medical directive or designate a “living trust” in the will, in case both parents die before the child turns 18. Similar to the previous net worth level, parents should buy 10 to 12 times their annual income in level term life insurance.

Families with net worth more than $2 million — A will, power of attorney and an advanced medical directive is a good idea, but parents should create an estate plan. .

Ed Leefeldt contributed to this report.

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Les Masterson


Les, a former managing editor, insurance, at QuinStreet, has more than 20 years of experience in journalism. In his career, he has covered everything from health insurance to presidential politics.