How to Establish a Trust Fund for a Life Insurance Beneficiary

A trust is a legal entity; therefore an attorney should be consulted to prepare the trust documents. He can provide guidance during the decision-making process and will ensure the trust is established correctly according to the law. If you have an existing life insurance policy, the attorney can move it into the trust. If you buy a new policy after establishing the trust, the attorney can ensure the purchase is completed correctly.

Because the trust will be irrevocable, you are not permitted to act as the trustee. You need to designate another individual to serve as the trustee. Optionally, you can elect to name a third party, like a bank, as the trustee. This is an important job, because they trustee controls the assets held by the trust. This person needs to act unbiased towards the beneficiaries and follow your instructions.

The beneficiaries of the trust receive the benefits of the life insurance policy when you die. The insurance company will pay out the proper amount to the trust, and the trustee then distributes the funds as you have instructed. You can name any one as a beneficiary, and designate what amount they are to receive and in what method of payment. For example, if you have multiple children, you could choose to split it evenly and disburse in one lump sum or, alternatively, establish some type of payment schedule.

Once the terms of your new trust are finalized it becomes irrevocable, and you're no longer in control. It's important to completely understand the conditions of the trust while you are creating it. Although a life estate trust is irrevocable, some state laws may permit you to revoke the trust, or alter the terms and conditions. Generally, for this to work, all of the beneficiaries need to agree in writing to the new terms and conditions.