Life Insurance Trust: Tips for Keeping Inheritance Property Out of Probate
Life Insurance Trust: Tips for Keeping Inheritance Property Out of Probate
A life insurance trust can be thought of as a safe deposit box for storing inheritance property. Life insurance policies are placed inside the trust and managed by a Trustee. Upon the policyholder's death, the Trustee distributes proceeds to designated beneficiaries.
A life insurance trust protects policy proceeds from estate taxes and the probate process. Probate is required in all 50 states and used to settle decedent estates. Probate can settle in a few months to longer than a year. Much depends on estate value, types of inheritance property, and family dynamics.
Life insurance policyholders designate a Trustee through their last will and testament. Oftentimes, Trustees are the surviving spouse or adult children. However, individuals can also appoint a third party such as an insurance trust company or estate planning lawyer to oversee the trust. Although Trustees manage the trust, policyholders retain control over designation of beneficiaries and how inheritance property should be distributed.
There are advantages and disadvantages to establishing life insurance trusts. The primary advantages are inheritance property and life insurance proceeds are exempt from estate taxation and avoid the probate process. The primary disadvantage is once life insurance trusts are established they become irrevocable and cannot be changed.
Individuals should decide who will manage their estate prior to establishing a life insurance trust. Other considerations include who will receive inheritance property and how life insurance proceeds will be distributed.
Life insurance proceeds can be distributed partially or in whole. Distribution can occur immediately after death, or on a monthly, quarterly, semi-annual, or annual basis. Distribution terms can be established to provide beneficiaries with lump sum cash when achieving certain milestones such as graduating from college, getting married, or starting a business.
Individuals who want to give money to heirs receiving government financial aid should consider establishing an irrevocable life insurance trust (ILIT). Life insurance proceeds can be distributed via scheduled payments so they do not interfere with the beneficiary's ability to receive state or federal funds.
ILITs allow policyholders to give monetary gifts up to $10,000 annually to anyone they choose. Married couples are allowed to receive up to $20,000 annually. Monetary gifts can be gifted to as many people as the policyholder desires. Life insurance proceeds are considered a gift to designated heirs. When policy premiums are equal to or less than $10,000 per beneficiary, proceeds are exempt from taxation.
One important element of ILITs is the Crummey Letter. Named after Clifford Crummey, a man who initiated a court case involving irrevocable life insurance trust gifts, the Crummey Letter must be sent to beneficiaries to notify them when annual premiums are made.
Beneficiaries must withdraw funds within a specific timeframe or the money is used to fund annual insurance premiums. Issuance of the Crummey Letter ensures annual premiums remain tax-free.
Life insurance trusts are complex and best handled by a professional estate planner. Each trust is as unique as the person establishing it. Although life insurance trusts cannot be changed once they are implemented, considerable flexibility exists during the phase of establishment. Trusts offer a safe way to protect estate assets and can provide funds to loved ones for years to come. Can your genetic makeup stop you from buying life insurance? Better Deal Life Insurance Deciding A Good Life Insurance Ways To Get Good Life Insurance Policy Searching For Life Insurance How personal bankruptcy impacts your life insurance policy Top Up Your Life Insurance Life Insurance for Police Officers and Other Law Enforcement Individuals The Many Options of No Medical Exam Life Insurance. What Is Best? Rotator Cuff Muscles Injury – Taking Care of Injured Rotor Cuff Do You Need To Pass A Physical To Be Granted Life Insurance? How To Improve Your Life In 51 Simple, And Not-so-simple Ways The Importance Of Life Insurance For Seniors