Life Insurance Trusts

As a Folsom attorney specializing in estate planning, I have many clients with significant life insurance policies. As such, they often inquire about setting up life insurance trusts. A life insurance trust, also known as an irrevocable life insurance trust (ILIT), is a legal arrangement created to own and manage life insurance policies on behalf of the policyholder’s beneficiaries. The primary purpose of a life insurance trust is to remove the life insurance proceeds from the policyholder’s taxable estate, potentially reducing estate taxes and ensuring that the death benefit is distributed according to the trust’s terms.

Here are key elements and benefits of a life insurance trust:

1. Ownership and Control: When you establish a life insurance trust, you transfer ownership of your life insurance policies to the trust. This means the trust, not you, becomes the policyholder and owner of the policies. You can retain some control over the trust, such as the ability to select beneficiaries and determine how the insurance proceeds will be distributed.

2. Estate Tax Reduction: By removing the life insurance proceeds from your taxable estate, you can potentially reduce or eliminate estate taxes that may be due upon your death. This is particularly beneficial for individuals with large estates that may exceed the estate tax exemption threshold.

3. Protection from Creditors: Assets held within an irrevocable trust, including life insurance proceeds, are generally protected from creditors’ claims because you no longer own them.

4. Avoiding Probate: Life insurance policies held in a trust are not subject to probate, which means the proceeds can be distributed to beneficiaries more quickly and without the costs and delays associated with probate.

5. Flexibility in Distribution: You can structure the trust to specify how and when the life insurance proceeds should be distributed to beneficiaries. This can include lump-sum payments, periodic payments, or even ongoing income for beneficiaries.

6. Providing for Specific Needs: Life insurance trusts can be used to provide for specific needs, such as funding educational expenses for children, supporting a surviving spouse, or ensuring the financial well-being of beneficiaries with special needs.

7. Crummey Powers: Many life insurance trusts include Crummey powers, which allow beneficiaries to withdraw contributions made to the trust within a limited timeframe. This feature can help ensure that contributions qualify for the annual gift tax exclusion.

8. Annual Gift Tax Exclusion: Contributions to the life insurance trust can often qualify for the annual gift tax exclusion (subject to certain limitations), allowing you to make tax-efficient gifts to fund the trust. It is recommended that you discuss your specific desires with a tax professional, in conjunction with an estate planning lawyer, to ensure that your goals are fulfilled. 

9. Professional Trustee: Some individuals choose to appoint a professional trustee or trust company to manage the trust, ensuring compliance with legal requirements and providing expertise in trust administration. The alternative would be to choose an individual that you are familiar with, such as a family member or friend.  This has the benefit of a personal touch but the chosen individual may lack the skills of a professional trustee. More on trustees here.

Conclusion

It’s important to note that creating and maintaining a life insurance trust is a complex legal process that requires careful planning and adherence to IRS regulations. Additionally, the trust must be irrevocable, meaning you cannot make changes to it once it’s established.

To establish a life insurance trust, you should work with an experienced Folsom lawyer who specializes in estate planning and trusts. They can help you create the trust, transfer the life insurance policies, and ensure that all legal requirements are met to achieve your estate planning and wealth preservation goals. If you have any questions about life insurances trusts, please contact Thapar Law at 916-579-0605 or send us a message.