Many people who purchase a life insurance policy simply name a specific beneficiary, such as their eldest child. That child receives the payout when they pass away.
But there is another option, which is to put the life insurance policy into a trust. Upon the person’s passing, the insurance policy pays out into the trust, and the trustee makes distributions to any beneficiaries named in the trust documentation. There are many potential reasons to use this tactic, but let’s look at three of them below.
Splitting between multiple beneficiaries
First and foremost, you can use the trust to distribute money to multiple beneficiaries. If you have a large family and want to ensure that the money is divided fairly and evenly, you may see this as a simpler tactic than naming multiple beneficiaries on the insurance policy itself. The trust just holds all of the money, and you can give the trustee whatever instructions you would like about how and when distributions should be made.
Maintaining eligibility for benefits
In some cases, beneficiaries qualify for certain benefits, such as Medicaid. If you are worried about disqualifying them from benefits if they receive a large payout from the life insurance policy, putting the money into a properly structured trust may help preserve their eligibility.
Holding money for young beneficiaries
Finally, a trust can be helpful if you have young beneficiaries who are still minors. At the very least, you may want the trust to hold the money until they turn 18. You can also pick other ages at which distributions should be made.
Having control over what happens to the payout is a major reason to use a trust. Make sure you know what legal options you have when setting up your estate plan.