Estate planning goes far beyond itemizing assets and listing beneficiaries to receive these assets. Especially for those who plan to leave a good deal of wealth and possessions when they pass, the process of estate planning should also take a close look at just what can be done to best preserve wealth for future generations.
There are a number of tools at your disposal when putting together an estate plan. The choices you make and the way you decide to set up your estate is a very personal matter. Your attorney should be looking at your financial goal and big picture – and then making suggestions for how to proceed from there. No matter what direction you go in, you and your attorney should be looking at all of the possible exemptions and tools that may be available when putting together the plan.
In this post, we are going to focus on just one of these tools: the irrevocable life insurance trust. In past blog posts, we have discussed a number of other possible tools, including those related to gift giving and retirement accounts, as well as qualified personal residence trusts. A life insurance trust is an additional tool to consider.
What is a life insurance trust?
In the simplest of terms, an irrevocable life insurance trust is a separate entity – a trust – that is the owner of your life insurance policy. This trust is responsible for making payments to the policy. As the person creating this trust, you decide not only who the trustee of the trust is, but also who the beneficiaries of the policy will be.
What are the benefits of a life insurance trust?
There are numerous benefits to having a life insurance trust, with the first – and arguably most important – being that the trust takes a substantial asset out of your estate, therefore reducing the estate tax liability after you pass. In even simpler terms: A life insurance trust can help preserve your assets and save your loved ones money after you pass.
Additionally, many people like the control a life insurance trusts gives, as you are able to name the beneficiaries to the policy and set forth rules on how the payouts will work. For example, if education is something that is near and dear to your heart, you can make it a requirement that your grandchild completes college before receiving any of the money from the policy. Or – if you want to see your wealth benefit future generations – the payout could happen after a child or grandchild marries, has their own child or reaches a certain age.
Lastly, if you want to leave money to someone who receives government benefits, the trustee can oversee this process in a way that will ensure the person does not lose their benefits – like they would if he or she were to just receive a large lump sum of money after your passing.
Really, you are the one who gets to decide how the policy will payout – the who, what, when and why.
What are the limitations to a life insurance trusts?
It is important to fully investigate both the positives and potential negatives to any tool you are using in your estate plans.
With an irrevocable life insurance trust, there is some permanency to the “irrevocable” portion, as you cannot change your mind later and put the policy back in your name. This is an important consideration to keep in mind if you think you will one day want to put the policy in your name or access the cash value of the policy.