Life Insurance Trusts for Child Beneficiaries

It's great to have life insurance to benefit dependent children when your income is lost because of your death, but it's an even better idea to make sure your insurance benefits are used the way you hope they will be. Setting up a trust for your beneficiary can help ensure that your wishes are carried out.

A trust is a legal arrangement that gives ownership of assets to one person for the benefit of another. The trustee, or person who officially holds the property for the beneficiary, does not have the right to personally benefit from the trust assets. The trustee must manage the assets responsibly and can be held personally liable for any lost funds.

It may take very little effort on your part to create a trust. If you're an Allstate policyholder, for example, you can simply write, "John Smith, trustee for Susie Jones" on the beneficiary line. You should check with your insurance company to see what wording it requires, and also name a guardian and describe the trust in your last will and testament. Once the trust agreement is set up, you can transfer funds or property to it. In the case of life insurance, the death benefit from your policy is transferred to the trust after your death.

The trust agreement should make clear who the trustee is and give the trustee instructions on how to use the money.

A common way for young parents to handle life insurance is to name each other as the beneficiary, but if both die, the money can be put into a trust for the benefit of the couple's children.

Consider special needs children

If your children have special needs and cannot work or care for themselves, leaving them to depend on Social Security income if you die, you can set up a trust to ensure that your life insurance funds are used for the children's care. If you give the money to the child outright, he or she could be ineligible for Social Security benefits until the money runs out. With a special needs trust, you can have a trustee pay for everything but essentials such as food, clothing, shelter, and medication, all of which can be covered with Social Security benefits.

Always make sure that the terms of your trust are in writing and that the insurance company is aware of your arrangements.