Who Can be Beneficiaries of the Trust? : Understanding Life Insurance Trusts

This is part 3 of the blog series discussing life insurance trusts and estate taxes.

10. Who can be beneficiaries of the trust?

You can name any person or organization you wish. Most people name their spouse, children and/or grandchildren.

11. How does an insurance trust give me control?

With an insurance trust, your trust owns the policy. The trustee you select must follow the instructions you put in your trust. And with your insurance trust as beneficiary of the policies, you will even have more control over the proceeds.

For example, your trust could allow the trustee to use the proceeds to make a loan to or purchase assets from your estate or revocable living trust, providing cash to pay expenses. You could provide your spouse with lifetime income and keep the proceeds out of both of your estates. You could keep the money in the trust for years and have the trustee make distributions as needed to trust beneficiaries, which can include your children and grandchildren. Proceeds that stay in the trust can be protected from courts, creditors (even ex-spouses) and irresponsible spending.

By contrast, if your spouse or children are beneficiaries of the policy, you will have no control over how the money is spent. If your spouse is beneficiary and you die first, all of the proceeds will be in your spouse’s taxable estate; that could create a tax problem. Also, your spouse (not you) will decide who will inherit any remaining money after he or she dies.

12. Are there other benefits to naming the trust as beneficiary of an insurance policy?

Yes. If you name an individual as beneficiary of a policy and that person is incapacitated when you die, the court will probably take control of the money. Most insurance companies will not knowingly pay to an incompetent person, and will usually insist on court supervision. But if your trust is beneficiary of the policy, the trustee can use the proceeds to provide for your loved one without court interference.

13. Where does the trustee get the money to purchase a new insurance policy?

From you, but in a special way. If you transfer money directly to the trustee, there could be a gift tax. But you can make annual tax-free gifts of up to $12,000 ($24,000 if your spouse joins you) to each beneficiary of your trust. (Amounts may increase periodically for inflation.) If you give more than this, the excess is applied to your federal gift/estate tax exemption.

Instead of making a gift directly to a beneficiary, you give it to the trustee. The trustee then notifies each one that a gift has been received on his/her behalf and, unless he/she elects to receive the gift now, the trustee will invest the funds – by paying the premium on the insurance policy. Each beneficiary must understand the consequences of taking the gift now; for example, it may reduce the trustee’s ability to pay premiums.

For additional questions on life insurance trusts and estate taxes, please contact our Trust Lawyer in Los Angeles today.

Understanding Living Trusts: How You Can Avoid Probate, Save Taxes and More FAQ (Part 3)

This is part 3 of the blog series entitled “Understanding Living Trusts: How You Can Avoid Probate, Save Taxes and More FAQ” discussing frequently asked questions about living trusts, probate, taxes and more.

Do I lose control of the assets in my trust?
Absolutely not. You keep full control. As trustee of your trust, you can do anything you could do before — buy/sell assets, change or even cancel your trust (that’s why it’s called a revocable living trust). You even file the same tax returns. Nothing changes but the names on the titles.
Is it hard to transfer assets into my trust?
No, and your attorney, trust officer, financial adviser and insurance agent can help. You need to change titles on real estate (in- and out-of-state) and other titled assets (stocks, CDs, bank accounts, other investments, insurance, etc.). Most living trusts also include jewelry, clothes, art, furniture, and other assets that do not have titles.

Also, beneficiary designations on some assets (like insurance) should be changed to your trust so the court can’t control them if a beneficiary is incapacitated or no longer living when you die. (IRA, 401(k), etc. can be exceptions.)
Doesn’t this take a lot of time?
It will take some time — but you can do it now, or you can pay the courts and attorneys to do it for you later. One of the benefits of a living trust is that all your assets are brought together under one plan. Don’t delay “funding” your trust. It can only protect assets that have been transferred into it.
Should I consider a corporate trustee?
You may decide to be the trustee of your trust. However, some people select a corporate trustee (bank or trust company) to act as trustee or co-trustee now, especially if they don’t have the time, ability or desire to manage their trusts, or if one or both spouses are ill. Corporate trustees are experienced investment managers, they are objective and reliable, and their fees are usually very reasonable.
If something happens to me, who has control?
If you and your spouse are co-trustees, either can act and have instant control if one becomes incapacitated or dies. If something happens to both of you, or if you are the only trustee, the successor trustee you personally selected will step in. If a corporate trustee is already your trustee or co-trustee, they will continue to manage your trust for you.

For additional questions about trust law, speak with our experienced Trust Attorney in Los Angeles today.

Continue to: Understanding Living Trusts: How You Can Avoid Probate, Save Taxes and More FAQ (Part 4)