Preventing a Life Insurance Windfall With a Trust

Preventing a Life Insurance Windfall With a Trust

by Leslie Freeland, November 29, 2018

Too Much Too Fast?

Have you ever heard about someone winning the lottery – then 5 months later, they are worse off financially than before they won? Unfortunately, without good money-management skills, this could also be true of someone who receives a large, life insurance payout.

Many people name a responsible adult to be their beneficiary, but what if they don’t? Some people may name their young child a beneficiary, and when that child turns 18, they may still not have the maturity to properly manage the life insurance funds. This is where a trust comes in.


Cars and Cruises – Oh My!

One of the main reasons people buy life insurance is to make sure their family is financially protected and provided for – maybe to get the mortgage and credit card debt paid off. But what do you do if that person is too young and inexperienced with money management?
With a trust, you can ensure that your child or children can be taken care of financially and not risk the chance of them unwisely spending everything on a Ferrari or a month-long cruise!

March 2017: Ferrari 458 supercar parked at Circuit de Catalunya in Barcelona Spain


Without financial guidance, they may end up like that lottery winner.


Control for Financial Stability

With a trust, you can control how much money is given to your beneficiary at one time. For example, you can say your beneficiary will receive a certain amount each year to help with expenses, or you can set specific requirements. For example, with a trust, you can require your child to complete college before receiving all of the life insurance funds.

Types of Trusts

There are several different types of trusts. In this case, you will want to avoid the simple “nominee” trust that puts power into the hands of the beneficiary.

A better type of trust is the “discretionary” trust. It takes your wishes into full account and means that the funds can only be managed and distributed the exact way you want them to.

Setting up a Trust – Make sure to get help!

You should always consult with a financial planner to make the decision on whether a trust is right for your goals. The financial planner will guide you through each step to get the trust set up properly.

In general, setting up a trust involves:

  1. Identifying the key people involved, such as the trustee and the beneficiaries. The trustee could be a company or an individual. They make sure the life insurance fund disbursement follows your wishes. The beneficiary or beneficiaries, in this case, would be your offspring, and when they are named, they would be sole recipients of the funds.
  2. Making sure that you lay out your instructions clearly before the trust is drawn up and you sign it. It’s best to get professional help, so you don’t make any mistakes along the way as you need to be very specific here.
  3. Considering one of the key documents, known as “the letter of wishes.” This will guide the trustees in how to manage and administer the trust and should be very, carefully worded with help from a professional. This may not be required but may be helpful to the trustee.
  4. Getting verification and identification documents from the named beneficiaries to help secure the trust.
  5. Considering whether you need a separate “protector, ” who can be a company or individual. The protector will provide another layer of oversight to make sure that your wishes are followed.
  6. Making sure that your life insurance policy is converted so that it is treated as “life insurance in trust.”

A financial planner will help guide you through all of these steps.

Time for Distribution

When the trust documents have been completed and signed, the trustee may fade into the background for some time.

Eventually, when you pass away, the conditions set down in the trust will become active, and it will be time to consider distributions.

As mentioned earlier, within the trust, there may be mandatory and discretionary distributions. For example, a certain amount of money may be given to each of the beneficiaries for help with everyday expenditures. However, the main assets held within the trust can only be turned over to the beneficiaries when certain conditions are met and consequently, this will be at the discretion of the trustee.

It’s not uncommon for the trustee to request supporting documents and financial information from the beneficiary before they make their decision.

If, for example, you have declared that funds are only to be given to the beneficiary to pay for college education, then the trustee will need to see tentative enrollment documents and other proof before they agree to distribute the funds.

Graduates wear graduation gowns,Ceremonies of university graduates.


Alternatively, you could stipulate that the beneficiary will only receive the funds if they graduate from a college or university. This will provide extra incentive and discourage the beneficiary from enrolling in a college, receiving the funds and then simply dropping out, cash in hand. Instead, they may be fully motivated to actually achieve the original goal.

Clarity Is Paramount

Just remember to be very clear and unambiguous when designing rules to protect the assets in the trust. Also, make sure that the beneficiaries do not have any power to replace the trustees upon your death, as you will want to avoid this loophole at all costs.

This is why it is so important to always consult with a financial planner before taking any action. With professional help, you can ensure the financial protection you intended to provide and not contribute to a windfall that may cause financial issues due to poor money management.





Asurea offers Life Insurance, Mortgage Protection Life Insurance, Medicare Supplement Insurance, Final Expense Insurance, Disability Insurance, Long-term Care Insurance, Retirement Planning products and more. For additional information, click on the ‘Learn More’ button below. Want to have articles just like this delivered to your inbox? Just enter your email address in the box below and click ‘Subscribe.’

This information is provided for general consumer educational purposes only and is not intended to provide legal, tax or investment advice. Dollar amounts are for illustrative purposes, not actual.


Leslie Freeland

Leslie Freeland

Find her at LinkedIn
Leslie joined Asurea as the Marketing Communications Coordinator in February 2015. Since then, she has been working closely with insurance professionals to educate the public on the importance of life insurance and protect the public from common scams with informational articles.
Leslie Freeland