Trust

What Does Trust Mean?

A trust is a legally binding arrangement in which one party authorizes another to manage certain assets on their behalf. In the context of insurance, life insurance policies are often placed into trusts, creating what is known as a life insurance trust. Upon the death of the grantor, the trust distributes the benefits to the beneficiaries. Naming a trust as the recipient of a payout works differently from naming a person directly, and getting the paperwork right matters because small mistakes with beneficiary designations can override what the trust documents say.

Insuranceopedia Explains Trust

People often set up life insurance trusts because they can be exempt from estate taxes. Given that death benefits typically involve substantial sums, estate taxes on insurance policies can be significant. As a result, individuals frequently use life insurance trusts to maximize the amount of money passed to their beneficiaries. The law usually requires that a life insurance trust be established at least three years before the grantor’s death for the death benefit to qualify for exemption from the estate tax. Because the three-year lookback can disqualify a policy bought too late, families planning around trusts usually want a policy that will stay in force for life rather than a term policy that may expire, which is why permanent life insurance is the typical choice for this kind of estate planning.