Answering the question of whether you need a life insurance trust first requires an explanation of what it is. A life insurance trust is a trust established by the settlor to deal with the life insurance proceeds that are payable upon his or her death.
It ensures that the money from a life insurance claim is kept separate from the estate when you die, allowing it to go directly to the specific person or people you have named as your beneficiary. In simple terms, a life insurance trust manages who gets the proceeds of your life insurance policy when you die.
But why do you need one when you can simply name a beneficiary to your life insurance policy?
The answer is simple. Life insurance policies cannot be paid to a minor. If you name your child (or children) as the beneficiary of your life insurance policy, they are not legally able to receive the funds from that policy should you die before their 18th birthday. By establishing an insurance trust in your will, you direct the life insurance proceeds to be paid to a trustee who then receives and administers the funds according to your instructions to the intended beneficiaries (your children) until they reach the age of majority.
Like appointing a guardian for your life insurance policy
Think of a life insurance trust as a way of appointing someone to be the guardian of your life insurance policy; a guardian who will use the proceeds of your policy according to your explicit instructions.
A beneficiary being under the age of majority isn’t the only reason to set up an insurance trust. It can also be used to control the timing of how funds are to be received and what they’re to be used for (maybe to prevent a beneficiary from spending the money too quickly or on things that you deem to be frivolous). As well, insurance trusts can provide for the orderly distribution of the proceeds to a disabled beneficiary in such a way as not to negatively affect any rights they may have to government assistance.
The way you word a trust document is crucial, so speak to a lawyer to make sure it’s done right.
* This article does not replace legal advice and is meant to be for information purposes only. Please consult us or any other legally trained professional when navigating the complexities around life insurance trusts.