Creating a trust to hold life insurance will involve some expense while arranging for premium payments requires expert advice. Image: Lukiyanova Natalia frenta/Shutterstock.com
By: FEDweek StaffThe ownership of your life insurance policy can have a substantial impact on how this asset will be handled. Choices include:
* Own the policy yourself. If you’re the owner of an insurance policy on your life, you’re in control. You’ll make any decisions that are necessary (payment of flexible premiums, for instance) and you’ll have access to the cash value, if you choose permanent life insurance.
However, ownership of a policy on your own life puts the proceeds into your taxable estate.
* Have another individual own the policy. If an adult son or daughter owns a policy insuring your life, the death benefit won’t be included in your taxable estate. Loss of control will be an issue, though, and the policy may be exposed to your child’s creditors and to a son- or daughter-in-law, in case of divorce proceedings.
* Have an irrevocable trust own the policy. This approach can shelter life insurance from estate tax as well as creditors. As long as the trustee is a responsible party, you can feel comfortable that the proceeds (and any cash value) will be handled carefully.
Creating a trust to hold life insurance will involve some expense while arranging for premium payments requires expert advice. Nevertheless, you may decide that the benefits make the effort and expense worthwhile.
Following are key steps and considerations for using a trust to hold a policy:
Choose the Right Type of trust: Determine whether an irrevocable life insurance trust (ILIT) aligns with your goals. An ILIT can remove the life insurance from your taxable estate and protect it from creditors.
Draft the Trust Document: Work with an attorney experienced in estate planning to create a trust document that outlines the beneficiaries, trustee, and specific terms related to the life insurance policy.
Fund the Trust: Once the trust is established, you will need to transfer the ownership of the life insurance policy to the trust. This involves changing the policy’s ownership designation with the insurance company.
Set up Premium Funding: The trust will need funds to pay the insurance premiums. You can either make direct contributions to the trust or establish a mechanism for funding the premiums, such as gifting funds to the trustee.
Designate the Trust as Beneficiary: Ensure that the trust is named as the beneficiary of the life insurance policy. This will ensure that the death benefit is paid directly to the trust rather than to individual beneficiaries.
Review and Maintain: Regularly review the trust’s provisions and ensure that it continues to serve your objectives, adjusting as necessary for any changes in personal circumstances or legal requirements.
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