Information on Life Insurance Trusts

At the passing of a person, life insurance funds received by a life insurance trust are not included in the individual’s inheritance. Continue reading to find out more.

A life insurance trust is a trust established by an individual (and sometimes the individual’s partner) to own life insurance on the individual’s and/or the individual’s spouse’s lives. The benefit of using a life insurance trust over merely having the life insurance directly is that the life insurance earnings obtained by the life insurance trust at the individual’s demise are not included in the individual’s inheritance.

An irreversible life insurance trust, which has the following characteristics, is used to reduce federal inheritance taxation. Some of these characteristics are unpleasant, but they are needed to obtain the inheritance tax benefit of not including the life insurance in your legacy.

irreversible: A life insurance trust is irreversible, which means that no of its conditions can be altered after it is created.
A administrator is needed for a life insurance trust, as is the case with all trusts. A fiduciary can be either a person or a corporation. However, you cannot be the guardian.
Obtaining Life Insurance: The company should apply for fresh life insurance, not you as a person. Transferring a current life insurance policy into a trust is feasible, but the life insurance will still be included in your inheritance unless you survive for at least three years after the move.
Ownership/recipient: The trust will own and be the recipient of the life insurance policy. This means that if you die, the profits of your life insurance will be distributed into the trust rather than to your inheritance or other heirs.
Payment of Premiums: The trust will be responsible for making insurance monthly payments to the life insurance firm. Because the trust will most likely lack funds to make monthly payments, you will need to move funds into the trust on a regular basis. You should not pay your insurance premiums immediately yourself.
Collecting the profits: The life insurance profits will be transferred into the trust upon your demise. In many instances, the life insurance funds will be required to pay inheritance taxes. The life insurance funds can be made accessible to the estate by either loaning them to the estate or having the trust purchase properties from the estate.