Life Insurance Trust
A life insurance trust is used to protect insurance proceeds from estate taxation. Beneficiaries are designated within the policy and distribution schedules are established. The life insurance policy is placed inside the trust and managed by a Trustee.
A life insurance trust consists of a Trustor, Trustee and beneficiaries. The Trustor is the person who establishes the trust. The Trustee is the person who manages the trust. This person is designated through the policyholder's Will.
Beneficiaries are the people who will receive life insurance proceeds. Policyholders can name anyone they desire. Beneficiaries can be a spouse, children, friends or a charitable foundation.
As with most estate planning strategies, there are pros and cons to establishing life insurance trusts. It is important to understand life insurance trusts cannot be changed once established. This can present problems if family members are designated beneficiaries.
For example, a woman named her four children as beneficiaries to her life insurance policy. A few years later, one of the children became heavily involved in drug use and criminal activities. He became abusive to his mother and she eventually cut all ties with him.
Although she was able to disinherit her son from other aspects of her estate, she could not remove him from the life insurance trust. When the woman died, the adult child was presented with nearly $100,000 in life insurance proceeds; creating turmoil within the family.
One benefit of establishing a life insurance trust is proceeds payments can be prearranged. This is particularly important when beneficiaries receive government assistance. Payments can be established on a monthly or annual basis so as not to interfere with the beneficiary's ability to receive financial aid.
Distributions can be scheduled to provide funds to heirs when they obtain certain milestones. These might include getting married, starting a business, or graduating from high school or college.
A unique feature of irrevocable life insurance trusts is they offer the ability for the policyholder to gift up to $10,000 per year to as many people as they choose. The annual premium payment is considered a gift to the beneficiary and is tax-free. If the Trustee contributes $40,000 per year, he can gift $10,000 to four individuals.
Considerable flexibility is offered through life insurance trusts, but they must be carefully constructed. No two trusts will be the same because they are customized to suit the Trustee's financial situation.
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Published on June 01, 2009 at 01:27 AM | Comments: 1