What to Consider Before Placing Your Life Insurance in an Irrevocable Trust

Placing Your Life Insurance in an Irrevocable TrustYou are thinking about placing your house and business profits into a trust to provide for your family. However, you’re not sure which types of assets to put in trust. Since an irrevocable trust offers the most tax benefits, you really want to be sure about the assets you give away—after all, there’s no way to change your mind later.

Benefits of an Irrevocable Life Insurance Trust

Many Florida residents opt to place their life insurance policies into an irrevocable trust of its own, called an irrevocable life insurance trust (ILIT). The ILIT becomes the beneficiary of your life insurance policy, meaning that the money from the insurance will be deposited into the trust rather than given to your surviving family. Depending on the trust agreement, the money can be used to pay for your outstanding taxes, given to your spouse, or held in the trust until your spouse’s death (when it will usually fall to the remaining children).

In addition to providing a secure source of money to pay for your end-of-life costs, an ILIT carries many tax incentives for your family. Money held in trust is not subject to estate taxes, unlike a bank account or stock investment that may be used to hold the funds. Also, since your spouse is not named as a beneficiary on your insurance policy, he or she will not have the amount taxed as part of his or her estate, allowing you to keep more of the proceeds from the policy.

What Seniors Should Know Before Placing Life Insurance Benefits in Trust

While there are many benefits to transferring your life insurance policy into a trust, there are a few things to consider before you do so, including:

  • Timing

    If you want to place an existing policy into a trust, the transfer must be done at least three years before the policyholder’s death. This rule was created to stop people from transferring their insurance policies in the weeks or days before death to prevent the IRS from collecting estate tax. However, it is possible to purchase a new policy with funds held in trust. In other words, you may be able to transfer cash into the trust and use it to purchase the policy naming the trust as beneficiary.
  • Trustee duties

    Trustees have specific responsibilities when it comes to overseeing a life insurance trust. At the very least, he must hold the policy, ensure that policy premiums are paid throughout the life of the policy, and inform trust beneficiaries of any changes or updates in the policy. The trustee’s duties continue after the insured passes away, but will then involve distributing payments to trust beneficiaries and managing any investments made with trust funds.
  • Additional policies

    You may wish to place more than one policy in your ILIT, or you may create several small trusts containing varying amounts with different beneficiaries. It is vital that you speak with an estate planning attorney before you begin, however, as there may be regulations that prohibit you from placing too much in trust.

To find out if you and your family could benefit from a life insurance trust, call Walt Shurden Elder Law today at 877-241-1230 or email us to have our staff contact you.

Walt Shurden
Board Certified Elder Law Attorney