PARENTS & HOMEOWNERS: MY 7-STEP ESTATE PLANNING PROCESS WILL PROTECT YOUR HEIRS
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Do I Need an Irrevocable Life Insurance Trust in my Estate Plan?
What is a Life Insurance Trust?
A life insurance trust is a trust that can be created to hold the proceeds of your life insurance policy. The trust becomes the legal owner of the policy, rather than you, upon its creation. This is an excellent tool for passing significant assets to your heirs without a tax bite.
A life insurance trust, or ILIT (Irrevocable Life Insurance Trust), as some refer to it, is typically created to avoid further taxes on an estate. Once you’ve created it, this trust cannot be changed, so you must plan carefully with an experienced estate planning lawyer to ensure you are prepared and have created the document in line with your wishes.
Things to Consider
A few things must be in place to have a valid life insurance trust:
- The trust must be irrevocable.
- You cannot be the trustee of the trust. This provides added assurance that you have no control over your life insurance policy once the trust is created and cannot make changes.
- The trust must exist for three years before your death. This extra insurance for the IRS that makes certain there aren’t any “last minute” transfers, specifically to avoid taxes.
Advantages of a Life Insurance Trust
One of the main reasons that people choose to create a life insurance trust is to help their heirs avoid estate taxes upon their death. In fact, upon the creation of a life insurance trust, a tax ID number is created just for the trust, so it is a separate entity from your social security or other tax ID numbers. Many think having a life insurance policy is enough; for some, it is, but this solution adds other benefits.
When the trust becomes the legal owner of the insurance policy, that removes the entire amount from the overall estate value that would be taxed upon your death, for some, they are well within the threshold of taxes, so this may not be a strong desire for them.
In most cases, you can structure the life insurance trust to help avoid applicable gift taxes for the recipient. This may allow additional funds to be added to the trust as premiums rather than adding to a gift intended for the recipient and avoiding other taxes.
Another way to tailor your life insurance trust is to stipulate within the wording how it shall be redeemed. For example, if you want to only allow a certain amount of it to be used per year per recipient, or after a certain age, or used specifically for college, you can make sure that it is apparent within the trust. Blended families find this especially appealing as you can stipulate within the trust which of the children are to benefit to ensure that even children from previous marriages may be included rather than having to sift through the legalities in probate.
The proceeds from a life insurance trust may also be used to pay estate taxes. The beneficiary can use some of the funds from the trust to offset costs associated with estate taxes. This can also help to have liquid assets available that can be used to offset the sale of property while settling the estate rather than taking a loss due to the taxes associated with the transaction.
Disadvantages to Life Insurance Trusts
Due to the structure of a life insurance trust being irrevocable, this alone can create a disadvantage. It is hard to prepare for the unknown, and with unforeseen changes happening, some may shy away from being locked into a document.
The trust must be established three years before the death to be valid. This can mean that it is something you want to think about sooner than later, but with that and the option to make changes to it as life changes, it is too much of a gamble for some to want to make.
However, an experienced estate planning attorney can walk you through the options to determine if this is the best option for your family. There are also other options to consider to provide “safety nets” for your family so you feel more comfortable creating a life insurance trust without being sure of the future.
Protection from Creditors
Another aspect that some families may appreciate is that the funds held within the life insurance trust are protected from creditors. This provides added protection for the decedent and the beneficiaries while the funds remain in the trust. This shields the funds from creditors and a future divorce of a beneficiary or future spouses of beneficiaries.
Do I Need a Life Insurance Trust?
Every situation is different and requires a different protection method for our legacy and those we leave behind. A skilled estate planning attorney can walk you through your options based on your exact situation and needs.
What may be the best fit for someone may not be the right solution for you. I have years of experience helping clients protect their assets from creditors, predators, and the government.. Contact my office today at (805) 244-5291 for a confidential, friendly, in-depth debt consultation.
There may be solutions available today that weren’t in existence in the past and may provide just the benefits you were hoping for your family. I look forward to developing the best strategy for you and your family.