Naming children as beneficiaries on your life insurance policy can result in legal complications.  States have their own laws to determine when child beneficiaries are entitled to the funds from a life insurance policy. If you create a trust and naming a trustee, you will be able to set the terms of how the life insurance funds will be used.

Reasons not to have your child as a beneficiary:

• Some of the money will be used up by lawyers
• You may end up having no say in how the money is used
• A guardian from the state controls the money until your beneficiary becomes turns 18
• High legal fees if the rights to the proceeds are litigated
• Family conflict and disagreement
• Your child may get the money before they know how to manage it properly

The answer:  Life Insurance Trusts
When you create a life insurance trust, you can say how you would like the money from the life insurance policy to be used. You also have to name a trustee who will manage the money so your wishes are followed.  For example, if you express in your trust that your beneficiary use the funds only for college expenses, a trustee has to grant permission for use of the funds only if they know the funds will go towards college books, dorm housing, tuition or other related experiences. This almost guarantees (unless you have a crooked trustee) that your life insurance money is used how you wanted it to be.

Setting up a Trust
To set up a trust you must designate an individual as a trustee or a professional trust company. After naming a trustee, your attorney will draft the restrictions of the trust. You should understand how your money will be taxed and get recommendations on how you would like your beneficiary to use the life insurance money. You will need to contact your life insurance company to make arrangements to have the funds sent to the trust upon your death. 

Special Needs survivors
If you create a trust for a beneficiary with special needs who collects Social Security, you should also specify how you would like the money to be used to provide for their care. A trust should specify that the trustee should use the money for everything but the things that Social Security pays for like housing, food, clothing and medications.  If this detail is omitted from the trust, the beneficiary could get the funds in one lump sum, which will prohibit them from receiving further Social Security benefits the lump sum as been spent.