If you have a testamentary trust, it begins to work after you die. If you want to name the trust as the beneficiary of a life insurance policy, you have to create the trust before you die with the trust activating at the time of your death. There are several types of testamentary trusts. Life insurance trusts, trusts for minor children, a bypass trust, marital trust and Q-TIP are all examples of testamentary trusts.
Irrevocable Life Insurance Trusts
Most life insurance trusts are irrevocable and used for the sole purpose of keeping the life insurance out of the taxable estate. In this case, the life insurance trust owns the policy and is the beneficiary if you die. You can't have any incidence of ownership in the policy once you put the policy in the trust. This means you can't borrow from the cash value, for example, or change the beneficiary. If you have those rights, the life insurance becomes part of the estate for estate tax purposes.
Trust for a Minor Child
In many cases, a revocable life insurance trust is really a trust to provide assets for a minor child or children. You can also use a trust as a means of support for a disabled adult. In many cases, life insurance is the biggest asset in the trust. You name the trust the beneficiary of the policy.
Some insurance companies offer the insured the option of establishing a spendthrift designation when you name the beneficiary. The funds go into the general account of the insurance company and provide protection from creditors for the beneficiary. A testamentary trust can also have a spendthrift clause that protects the death claim from attachment by the beneficiary's creditors if the he put the proceeds in the bank.
Marital Trusts and QTIP Trusts
QTIP is an acronym for Qualified Terminable Interest Property. Both the marital trusts and QTIP are estate planning tools to maximize the estate tax credit and maintain a specific amount of control over the disposition of the assets upon the death of the spouse. Naming the trust as the beneficiary of your life insurance proceeds is important for either trust to work properly.
No matter what type of testamentary trust you use, you can name the trust as a beneficiary. It's important to seek the help of an estate planner or competent attorney when creating or funding these trusts. A testamentary trust is one way to avoid part of the estate taxes, supply funds for the tax or simply designate the use of the money from insurance proceeds if you die.