Layin’ it on the Line: Is an irrevocable life insurance trust policy right for you?

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FEATURE — Created to own and control a life insurance policy or policies while the insured is alive, irrevocable life insurance trusts are tools that are sometimes recommended by estate and planners. 

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These insurance trusts also manage and distribute proceeds from a policy when an insured dies and have three components: a grantor (creator of the trust), a trustee (manager of the trust) and a beneficiary or beneficiaries. Beneficiaries are those who receive the assets of the trust when the grantor dies.

Under this type of insurance trust, the trustee purchases the policy or policies, and the trust becomes the owner. When insurance benefits are paid out upon the grantor’s death, the trustee collects those funds, pays any estate taxes due, along with outstanding debts such as legal fees and probate costs, then distributes the rest to the beneficiaries.

Benefits

The primary reason most people consider an irrevocable life insurance trust is to help mitigate estate taxes. Over the past few years, the government has increased the estate and gift tax exemption to $11.58 million per individual. Since the majority of people don’t come anywhere close to that amount, the tax benefits of this type of trust are not as attractive as they once were.

Still, there are other reasons people choose an irrevocable life insurance trust. These include:

  • Beneficiary incapacity: If a life insurance beneficiary is incapacitated, having this insurance trust can prevent the court system from controlling the proceeds.
  • Provides cash to pay expenses: If there are estate taxes or other debts, this trust will provide immediate money to pay those expenses.
  • More control: This trust, when properly designed, gives you more control over the policy or policies and the use of proceeds.
  • Income for a spouse: This insurance trust can provide income to your spouse without that money being included in the spouse’s estate.
  • Potential protection for heirs: Depending on the state in which you live, proceeds from life insurance payouts may have protection from creditors.
  • Ability to include a “spend-thrift” provision: If you have an heir or heirs who have issues managing money, your insurance trust can contain a spend-thrift provision. A spend-thrift provision pays your beneficiaries monthly instead of giving them a lump sum upfront.

These trusts are not for everyone. They have some definite cons worth considering:

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Irrevocable life insurance trusts generally cannot be modified. The “irrevocable” part of it means that it is nearly impossible to make changes other than changing your trustee. Once you place a policy in this trust, you give up all rights to that policy. You cannot reassign it to a different trust or entity.

These trusts are complex and nuanced legal vehicles requiring the expertise of an attorney who specializes in trusts. They are rather expensive to create and maintain, and you should consider these costs.

These trusts also can be very expensive to create and maintain, as they are not something you can do yourself with online software. It requires the often pricey services of an experienced estate planning attorney. In addition to setup costs for this trust, there are also ongoing expenses that can add up.

While this type of trust offers certain advantages for high-net-worth individuals, it is far from the only option. There are many different kinds of trusts. Each of these trusts are designed to solve specific estate issues.

If you are considering forming a trust, use an authorized professional and experienced trust designer (attorney) who understands your goals and unique financial situation to see if this type of trust is the best choice. Legal representation is important when considering; never attempt this alone.

Copyright © Lyle Boss, all rights reserved.

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