Reasons Not to Name a Child Beneficiary

• Life insurance companies and lawyers warn against naming a child life insurance beneficiary because you may end up having no say in how the money is used, and it can become a tangled web for surviving family members. In the event that your child is named beneficiary and you die before she turns 18, the court will appoint a guardian of the state to control the finances until she becomes an adult. This process usually incurs hefty legal fees and familial strife. It could also result in your child receiving money before knowing how to manage it properly.
  
  

Life Insurance Trusts

• By creating a life insurance trust, you can stipulate how you would like the money from your life insurance to be used. You must also name a trustee who will oversee the management of the funds so they are used in the manner of your choosing. For example, if you express in your trust that your beneficiary use the funds only for educational expenses, a trustee has the right to grant permission for use of the funds only if he believes that the funds will go specifically toward education-based materials, tuition or other educational experiences. A trust ensures that your life insurance money is used in the way that you intend it to be used.
  
  

How to Set Up a Trust

• The first step to setting up a trust is to designate an individual as a trustee, or to select a professional trust company. After choosing a trustee, you will meet with a lawyer to draft the parameters of the trust. Your lawyer will help you understand how your money will be taxed and how best to specify how you would like your beneficiary to use the life insurance money. Contact your insurance company to make it aware of the trust.
  
  

Beneficiaries with Special Needs

• When creating a trust for a child beneficiary with special needs who requires Social Security income, you may also specify how you would like the money to be used to provide care for the child. Without making this stipulation, the beneficiary may receive the funds in one lump sum, which prohibits him from receiving any Social Security benefits until the money is gone. A trust may explain that the trustee should use the money for everything but the things that Social Security covers, such as food, clothing, medication and shelter.