Life Insurance Trusts
Life Insurance Trusts vs. Revocable Living Trusts
An Estate Planning Lawyer Explains Types of Trusts
Sizeable estates may be vulnerable to taxation when the owner passes away. If you are searching for methods to minimize the potential for estate taxes, a life insurance trust can help. Estate planning lawyer Michelle Lanchester helps people in Maryland and Washington DC plan for the future, and she can help you decide if a life insurance trust is right for you.
What is a Life Insurance Trust?
A life insurance trust is an irrevocable trust that legally owns the life insurance policy. The trust is designed to pay out to a named beneficiary, who, upon the death of the insured, receives the disbursement of the life insurance policy. Most significantly, the money does not go through the probate process, meaning it does not count toward the insured’s taxable estate.
If you choose to create an irrevocable life insurance trust (ILIT), you lose control over the life insurance policy, since the trust is irrevocable and you, the purchaser of the life insurance policy, will not be the trustee. If you choose to retain any control of the policy, the IRS will include the life insurance policy in your taxable estate. If this concerns you, you may want to consider a revocable living trust as an alternative.
However, with a life insurance trust, you will name the beneficiary and determine how to pay premiums. You can choose to pay the premiums yourself or give the money to the trustee of your ILIT to pay the premiums. There are IRS requirements regarding the manner in which the premiums are paid and the appropriate notice requirements to the beneficiaries of your ILIT.
Importantly, the IRS only excludes the transfer from the taxable estate if the policy exists three years before the insured dies. If the insured passes away before the three years go by, the IRS includes the policy in the taxable estate. The key to successfully utilizing an irrevocable life insurance trust is to create the trust and establish a plan as soon as possible. Successfully created policies can provide tremendous assistance to beneficiaries and minimize estate taxes.
How to Make a Life Insurance Trust
If you think a life insurance trust is the right type of trust for you, speak with qualified estate planning attorneys to get started. Life insurance trusts are complex legal documents, and a lawyer can walk you through the specifics of the trust and assist you in drawing up the document. Contact trusts attorney Michelle Lanchester today, and she can helping in setting up a trust to support your loved ones.