"What you leave at your death let it be without controversy, else the lawyers will be your heirs." -- Francis Osborne

A trust is a legal document that establishes a relationship in which one person (trustor) transfers an asset to another person (trustee) who manages and controls the asset for the benefit of a third person (beneficiary). A life insurance trust is a trust relationship established specifically to own a life insurance policy. Having a life insurance trust could potentially benefit your life insurance plan, and ultimately your heirs. It fact, not having one could be a mistake that leaves an irresponsible beneficiary broke and penniless.

By having your life insurance trust as the owner and beneficiary of the policy you could create several potential advantages. First, you can better insure that your lost income is replaced and continues for as long as it needs to-the main goal of life insurance. Second, you can insure that the life insurance proceeds are invested according to your instructions. Third, as I eluded to above, you can prevent the life insurance proceeds from being paid in a lump sum, only to be squandered by financially irresponsible beneficiaries in a short time. Fourth, you potentially remove the life insurance proceeds from your estate, avoiding probate and estate taxes. Depending on your unique situation, thousands of dollars could potentially be saved by implementing this strategy.

A word of warning: if for some reason you decide to purchase a cash value type life insurance policy, DO NOT put it into a life insurance trust. Because a life insurance trust is irrevocable, you will not be able to borrow your cash value from those policies. However, if you follow the strategy of only buying term life insurance, you can get around the irrevocability issue. To effectively "revoke" an irrevocable life insurance trust connected to the term policy, you just stop paying the premiums.

If you feel that establishing a life insurance trust may be the right strategy for your life insurance plan, consult with with your financial adviser and an attorney knowledgeable in trusts.