How and Why to Set Up a Life Insurance Trust for Your Children

A life insurance trust can give you flexibility and control over how your kids receive your death benefit after you die.
Ryan Brady
By Ryan Brady 
Updated
Edited by Lisa Green

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Nerdy takeaways
  • A life insurance trust allows you to pass money to your kids smoothly after you die, according to your wishes.

  • If you have millions in assets, life insurance trusts can help you avoid estate taxes on your life insurance death benefit.

  • You can set up a trust using any type of life insurance policy.

Buying a life insurance policy is a great way to ensure your kids are financially taken care of if you meet an untimely death. But what if your kids are still minors when you die? Or what if they’re a bit older and you want to make sure they use the payout from your life insurance wisely?

This is where a life insurance trust comes in.

Rather than have your kids or their guardian receive a pile of cash upon your death, a life insurance trust spells out how the payout from your policy should be used, per your wishes.

For example, let’s say you have a life insurance policy that pays $1 million when you die (this is called a death benefit). You can set up a trust so that if you die while your kids are still young, they’ll receive chunks of your policy’s death benefit over time, like when they go to college, get married or turn 40. Some trusts can even control how your beneficiaries are allowed to spend the money.

But a life insurance trust isn’t for everyone. Consider one if:

  • You have young kids. If your kids are beneficiaries on your life insurance policy and you die while they’re still minors, the life insurance company won’t be able to pay them benefits until the court appoints a guardian. That takes time and money for attorney fees and court costs.

  • You have a child with a disability. People with disabilities generally cannot have more than $2,000 of assets in their names and still qualify for Supplemental Security Income government assistance payments

    Special Needs Alliance. Government Benefits. Accessed Jul 5, 2023.
    . A special needs trust can hold assets, such as life insurance money, for your child without disqualifying them from government benefits.

  • You have a large death benefit and want to control how it’s used. Even if your kids are old enough to receive a death benefit (typically 18 or 21, depending on where you live), are you confident they’ll use that windfall responsibly? With a life insurance trust, your policy’s death benefit can be used according to guidelines you set in the trust, and it may even help dodge hefty estate taxes.

Did you know...

A life insurance trust isn’t its own type of trust. It simply refers to a trust you set up for the sole purpose of holding your life insurance policy’s death benefit when you die. If you prefer, you can attach life insurance to any trust, including ones that hold other assets, like your house or brokerage account.