When Should I Set Up an Insurance Trust? : Understanding Life Insurance Trusts

This is part 4 of the blog series discussing life insurance trusts and estate taxes.

14. When should I set up an insurance trust?

You can set up one any time, but because the trust is irrevocable, many people wait until they are in their 50s or 60s. By then, family relationships have usually settled – and you know whom you want to include as a beneficiary.

15. Are there any restrictions on transferring my existing policies to an insurance trust?

Yes. If you die within three years of the date of the transfer, it will be considered invalid by the IRS and the insurance will be included in your taxable estate. There may also be a gift tax. Be sure to discuss this with your trust attorney.

16. Can I make any changes to the trust?

An insurance trust is irrevocable, so you can’t make changes after it has been set up. Read your trust document carefully, and be sure it’s exactly what you want before you sign.

Just don’t wait too long – you could become uninsurable. And remember, if you transfer existing policies to the trust, you must live three years after the transfer for it to be valid.

17.  Should I seek professional assistance?

Yes. If you think an irrevocable insurance trust would be of value to you and your family, talk with an insurance professional, estate planning attorney, corporate trustee, or CPA who has experience with these trusts.

Related articles

Understanding Life Insurance Trusts: Can I be my own trustee?

This is part 2 of the blog series discussing life insurance trusts and estate taxes

6. What if my estate is larger than this?

 I) If the trust buys the insurance, it will not be included in your estate. So the proceeds, which are not subject to probate or income taxes, will also be free from estate taxes.

II) Insurance proceeds are available right after you die. So your assets will not have to be liquidated to pay estate taxes.

III) Life insurance can be an inexpensive way to pay estate taxes and other expenses. So you can leave more to your loved ones.

7. How does an irrevocable insurance trust work?

An insurance trust has three components. The grantor is the person creating the trust – that’s you. The trustee you select manages the trust. And the trust beneficiaries you name will receive the trust assets after you die.

The trustee purchases an insurance policy, with you as the insured, and the trust as owner and (usually) beneficiary. When the insurance benefit is paid after your death, the trustee will collect the funds, make them available to pay estate taxes and/or other expenses (including debts, legal fees, probate costs, and income taxes that may be due on IRAs and other retirement benefits), and then distribute them to the trust beneficiaries as you have instructed.

8. Can I be my own trustee?

Not if you want the tax advantages we’ve explained. Some people name their spouse and/or adult children as trustee(s), but often they don’t have enough time or experience. Many people choose a corporate trustee (bank or trust company) because they are experienced with these trusts. A corporate trustee will make sure the trust is properly administered and the insurance premiums promptly paid.

9. Why not just name someone else as owner of my insurance policy?

If someone else, like your spouse or adult child, owns a policy on your life and dies first, the cash/termination value will be in his/her taxable estate. That doesn’t help much.

But, more importantly, if someone else owns the policy, you lose control. This person could change the beneficiary, take the cash value, or even cancel the policy, leaving you with no insurance. You may trust this person now, but you could have problems later on. The policy could even be garnished to help satisfy the other person’s creditors. An insurance trust is safer – it lets you reduce estate taxes and keep control.

For additional questions on life insurance trusts and estate taxes, please contact our Estate Planning Lawyer in Woodland Hills, Ca today.

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