subject: Who Needs an Irrevocable Life Insurance Trust? [print this page] Who Needs an Irrevocable Life Insurance Trust?
An irrevocable life insurance trust is an estate planning strategy that protects insurance proceeds from inheritance tax. Ownership is transferred to the estate and policies placed into a trust. This allows proceeds to be distributed to designated beneficiaries and avoid the probate process.
Setting up an irrevocable life insurance trust requires a professional estate planner. The term 'irrevocable' means the policy cannot be altered once in place, so policy holders must give careful consideration to payment terms and designated beneficiaries. The only option to cease premium payments is to surrender the policy.
Irrevocable trusts are for people owning assets valued at $2 million or more. There is no need for this type of life insurance when estates' value is less because of allowable IRS inheritance tax exemptions.
Individuals often use life insurance trusts to accrue sufficient funds for heirs to cover estate taxes incurred by inheritance gifts. However, trusts can be structured to suit future needs of beneficiaries.
Life insurance trusts are managed by a Trustee. This individual has access to confidential information and essentially knows everything about the Insured's personal finances. Once the trust is in place the Trustee cannot be changed, so it is imperative to choose wisely.
The exception is a Trustee can be discharged for failure to perform duties. The Insured must file an official change of Trustee request through the court. Two primary duties of Trustee are to pay premiums and notify beneficiaries of withdrawal right. Trustees can be sued for financial damages if they neglect duties.
Policyholders often designate family members to the position of Trustee, but this is not always the best decision. An alternative option is to hire a family law attorney or trust management service. Some banks and investment brokerages offer trust management services as well.
Policyholders designate beneficiaries to receive death benefits and remits payments to the estate for each beneficiary. The IRS allows the Insured to gift a maximum tax-free contribution of $13,000 per beneficiary, annually.
The Trustee is required by law to notify beneficiaries in writing when contributions are deposited. Beneficiaries have up to 30 days to withdraw funds; otherwise the money remains in the trust.
The goal of irrevocable trusts is for beneficiaries to forego withdrawing monetary gifts. Legally, they have the right to cash-out, but the purpose of the trust is to provide lump sum cash to cover estate taxes upon the Insured's death.
Another feature of life insurance trusts is policyholders can setup payment schedules to provide beneficiaries money when they reach certain milestones. These could include college graduation, marriage, buying a home, or starting a business.
Lastly, policyholders can establish a Dynasty trust which eliminates taxes for future generations of beneficiaries. Also known as a generation skipping trust, Insured can eliminate inheritance tax for grandchildren and great-grandchildren.
Irrevocable life insurance trust is a powerful estate planning tool. These trusts must abide by specific guidelines and be documented properly. Careful consideration must be given to the Trustee, beneficiaries, and distribution schedule because once in place terms cannot be altered.
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