From Policy to Payout: Using Trusts to Control Life Insurance Benefits
There are instances where you would not name a living, breathing person as a life insurance policy beneficiary. One such situation is when the policyowner/insured establishes a trust and names it the beneficiary. When the policyholder dies, the executor of the trust files a claim for the death benefit, and within days, the funds are released to the trust to carry out the instructions of the grantor/policyowner. Oftentimes, insurance policy proceeds held by trusts pay off mortgages and other debts intended to stay within a family's legacy and take specific actions, including financing a child's education.
You'll want to work with a reputable, licensed estate planning attorney in your state to determine whether a revocable trust or irrevocable life insurance trust (ILIT) works best for you. The name of your trust might be something like, "The Robert Clay Living Trust dated March 20, 2025, Robert Clay, Trustee." Meeting with a certified professional accountant or tax attorney for estate taxation guidance might be wise. For most people, where it makes sense to have a trust, a revocable trust is the most efficient and simple option given its flexibility and the ability to utilize it even in periods of disability, not just at death. However, life insurance proceeds will generally count toward your estate's value for estate tax purposes, so you should discuss the best route with your attorney.
Once established, it's time to update your current life insurance policy to list the trust, not your current beneficiaries, in its name. Alternatively, and in many cases, more easily, contact a reputable licensed insurance agent in your state to have the trust apply as the owner and beneficiary of a new policy. You may pay the premiums, but your trust owns the policy. Be sure to inform the trustee and executor of your estate (if a different person) of the insurance details, and provide copies of the trust and insurance policy to the trustee. Over time, you may experience a major life event that might warrant updates to the instructions for managing and distributing the funds from your life insurance death benefit, including adding another policy if your growing assets call for it. Periodically review the trust and insurance policy to ensure you remain on track for how you want your estate managed after your death.
