Estate Planning: Should I Create an Irrevocable Life Insurance Trust?
First and foremost, you must be insurable.
The principal purpose of creating an Irrevocable Life Insurance Trust is the owning of one or more life insurance policies.
The Irrevocable Trust works the same as any other trust in that a contract is between a grantor and a trustee to administer the property, or in this case, insurance contract for the benefit of the named beneficiaries.
Why Would I Want to Create an Irrevocable Life Insurance Trust? When it comes to estate taxes, a life insurance policy is included as part of the gross estate.
Therefore, a sizable policy may cause an estate tax burden on an insured's estate decreasing the beneficiaries share.
Two important drafting considerations in estate planning would require is: 1) the grantor (insured) is not a trustee; and, 2) the trust must be irrevocable.
As a result, one of the most common reasons to create an Irrevocable Life Insurance Trust is avoidance of estate tax.
A properly structured Irrevocable Trust is set up with the death benefits paid to the Trust, thereby excluding the proceeds being included in the gross estate of the insured.
Also, an estate planning attorney can structure the Irrevocable Trust for the insured's surviving spouse allowing the exclusion of the proceeds from the gross estate too.
Another common reason to create this type of Irrevocable Trust is for asset protection against creditors.
In this scenario, you would fund the Irrevocable Trust with cash transfers and use the cash to purchase the insurance policies.
The insurance policies would name the Irrevocable Trust as beneficiary.
Since you would no longer have control or own the insurance policy, creditors would not have a claim against the Trust.
To learn more about this topic read Part 2 of my asset protection series.
What Are the Disadvantages of This Type of Trust? Keep in mind that an irrevocable trust means there can be no modifications, rescissions or amendments once the trust is created.
After the grantor funds or vests the property to the trust, the grantor cannot modify or amend the terms of the trust or reclaim ownership of the vested property.
As a result, a grantor must fully understand his or her decision prior to creating an Irrevocable Life Insurance Trust.
There are gift tax consequences when funding or transferring insurance policies into an Irrevocable Life Insurance Trust thereby causing a taxable gift.
The complexity of gift taxing is beyond the scope of this particular article and will be discussed in a future article.
The annual exclusion can be used to reduce or eliminate the gift tax.
Lastly, there may be a three (3) year vesting period to achieve the tax benefit.
As a result, the creation of any type trust for your estate plan is complex and should be handled by an attorney to ensure the maximum benefit of an Irrevocable Life Insurance Trust is achieved by the insured.
FULL DISCLOSURE This article only reflects my personal views and does not substitute for legal advice.
The information in the article is solely an opinion and is provided for educational purposes only.
Information may not be up-to-date contingent upon date of reading of the article.
The principal purpose of creating an Irrevocable Life Insurance Trust is the owning of one or more life insurance policies.
The Irrevocable Trust works the same as any other trust in that a contract is between a grantor and a trustee to administer the property, or in this case, insurance contract for the benefit of the named beneficiaries.
Why Would I Want to Create an Irrevocable Life Insurance Trust? When it comes to estate taxes, a life insurance policy is included as part of the gross estate.
Therefore, a sizable policy may cause an estate tax burden on an insured's estate decreasing the beneficiaries share.
Two important drafting considerations in estate planning would require is: 1) the grantor (insured) is not a trustee; and, 2) the trust must be irrevocable.
As a result, one of the most common reasons to create an Irrevocable Life Insurance Trust is avoidance of estate tax.
A properly structured Irrevocable Trust is set up with the death benefits paid to the Trust, thereby excluding the proceeds being included in the gross estate of the insured.
Also, an estate planning attorney can structure the Irrevocable Trust for the insured's surviving spouse allowing the exclusion of the proceeds from the gross estate too.
Another common reason to create this type of Irrevocable Trust is for asset protection against creditors.
In this scenario, you would fund the Irrevocable Trust with cash transfers and use the cash to purchase the insurance policies.
The insurance policies would name the Irrevocable Trust as beneficiary.
Since you would no longer have control or own the insurance policy, creditors would not have a claim against the Trust.
To learn more about this topic read Part 2 of my asset protection series.
What Are the Disadvantages of This Type of Trust? Keep in mind that an irrevocable trust means there can be no modifications, rescissions or amendments once the trust is created.
After the grantor funds or vests the property to the trust, the grantor cannot modify or amend the terms of the trust or reclaim ownership of the vested property.
As a result, a grantor must fully understand his or her decision prior to creating an Irrevocable Life Insurance Trust.
There are gift tax consequences when funding or transferring insurance policies into an Irrevocable Life Insurance Trust thereby causing a taxable gift.
The complexity of gift taxing is beyond the scope of this particular article and will be discussed in a future article.
The annual exclusion can be used to reduce or eliminate the gift tax.
Lastly, there may be a three (3) year vesting period to achieve the tax benefit.
As a result, the creation of any type trust for your estate plan is complex and should be handled by an attorney to ensure the maximum benefit of an Irrevocable Life Insurance Trust is achieved by the insured.
FULL DISCLOSURE This article only reflects my personal views and does not substitute for legal advice.
The information in the article is solely an opinion and is provided for educational purposes only.
Information may not be up-to-date contingent upon date of reading of the article.
