What is the purpose of a trust in a life insurance settlement?

The purpose of a trust in a life insurance settlement primarily revolves around managing and distributing the policy proceeds effectively. By placing a life insurance policy within a trust, the policyholder can establish specific instructions regarding how the death benefit will be allocated upon their passing. This allows for the proceeds to be managed in a way that aligns with the policyholder's wishes, such as providing for minor children, ensuring that funds are used for particular needs, or protecting assets from creditors.

Using a trust also provides certain tax advantages and can help avoid probate, streamlining the process for beneficiaries to receive their inheritance. In this context, the trust acts as a fiduciary entity that handles the funds responsibly and according to the established guidelines, making it a crucial tool in estate planning.