Irrevocable Life Insurance Trust
A life insurance trust is usually used to shelter financial assets from estate taxes. Since estate taxes in the United States are currently at 35%, an irrevocable life insurance trust can preserve a significant amount of an estate for the beneficiaries. There are disadvantages to life insurance trusts since the insured person no longer owns the insurance policy: it is owned by the trust, and a trustee must be appointed. Once an irrevocable trust is in place, it cannot be changed as family circumstances change. A life insurance trust has both pros and cons, and can be the best type of life insurance for certain families looking for affordable coverage.
Irrevocable Life Insurance Trusts
As a rule, life insurance trusts are irrevocable, and once beneficiaries are named, they cannot be changed regardless of changes in family circumstances. The policy must be endowed (have cash value) at the time the trust is set up, and if premium payments are paid, they are counted as taxable gifts to the trust. The gift tax can be avoided if the life insurance trust is constructed as a Crummey or “present interest” trust. A Crummey Trust should be set up by an attorney, since it involves complex legal issues.
Additional Life Insurance Policies – Irrevocable Trusts
An irrevocable trust must be established at least three years before an insured person dies. The insured person cannot add additional life insurance policies to the trust, but the trust can use endowed funds to purchase additional life insurance policies on the insured. As with the original trust, the new policies must be in force at least three years before the death of the insured to qualify as tax exempt. Once the insurance policy is invested in the trust, the insured cannot redeem any of its cash value.
Advantages of a Life Insurance Trust
For those with substantial assets, the life insurance trust provides a way to protect a large portion of estate assets from government taxes. The money in a life insurance trust must be money the insured does not intend to use during his lifetime, and the trust must be set up at least three years prior to the insured’s death.
Since the life insurance policy is fully owned by the trust, the funds cannot be claimed for payment of medical or long-term care expenses during the insured’s lifetime. Essentially, the money will only be available to beneficiaries upon the insured individual’s death.
Disadvantages of a Life Insurance Trust
The primary disadvantage of the life insurance trust is that once the funds are put in the trust, the insured person has no control over them and cannot access them if financial problems arise. If family circumstance change, the terms of the trust cannot be changed the way the terms of a will can be altered. Unless there is a family member who is not a party to the trust that can be named as trustee, the insured will have to hire a trustee to manage the trust.
Life Insurance Quotes
Life insurance of any kind is a complex matter, and you must have the best, most accurate, up-to-date information to make an informed choice regarding this essential type of coverage. TheLifeInsuranceQuote.com is your best choice for all types of life insurance quotes; we instantly provide free life insurance quote comparisons so consumers can find the best, affordable policies for their needs.
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