When most people set up a life insurance policy, they simply use the beneficiary designation on that policy. They choose the person who should receive the death benefits when they pass away. They can also choose multiple beneficiaries simultaneously.
But another option to consider while making an estate plan is putting that life insurance policy into a trust. If you do this, then the trust owns the policy, even though you are paying the premiums. You can also set up a fund to pay these premiums, which is handled by the trustee.
What happens when you pass away?
If you pass away and your policy is owned by a trust, the death benefit is paid out into that trust. The life insurance provider authorizes the payment, which is then deposited into the fund.
Who controls the payouts?
Your trustee is then in charge of managing the fund moving forward. You do not have to make a beneficiary designation on the policy, but you do name beneficiaries in the trust. The trustee distributes the funds as you intended.
This can also often give you a higher level of control. You can specify what the life insurance money should be used for, rather than leaving it up to the discretion of the beneficiary.
It can also be helpful if you have named young beneficiaries. If you have children who are minors, for example, the trust can hold the money for them until they become adults.
Setting up your estate plan
Trusts can be a valuable part of an estate plan, whether you are funding them yourself or using your life insurance policy. It can help to work with an experienced estate planning attorney to ensure that everything is set up correctly.