Why Should Someone Use a Life Insurance Trust?

As couples start to approach the age of retirement, estate planning becomes a significant factor. Most people would like to pass on their assets to their children, grandchildren, or other people that they care about when they pass away. Some people may even assume this happens automatically, without drafting any legal documents to ensure this will happen. Unfortunately, this often is not the case. In reality, many people could lose a significant amount of their money to the estate tax without proper estate planning. One of the biggest assets that could be subject to this tax is someone’s life insurance benefit. Many people take out a life insurance to secure their expected wages that they would earn during their lifetime in the unfortunate event that they pass away at a young age. Others may look at life insurance as a form of savings. Either way, having a life insurance policy in place can be extremely beneficial to one’s family, including a spouse left behind, their children, or other relatives. Someone who sets up a life insurance does so because they want to make sure their family is financially secure and taken care of in the event they pass away. It is often a good idea for people to obtain a life insurance policy for this reason.

The Life Insurance Benefit

Many people take out a life insurance policy as a way to ensure that their loved ones have a source of income if they were to pass away prematurely. As people get older, their life insurance premium (and the benefit) could change. Most of the time the life insurance premium increase as a person gets older. As people get closer to retirement age, their life insurance benefit starts to become an issue of the estate tax and less about protecting income (because they may have already retired). Even though the benefit is paid upon someone’s death, life insurance could still be considered part of someone’s estate. This is where an insurance trust comes into play.

How Do I Set Up an Insurance Trust?

The insurance trust has a few different components. The first person is called the grantor. This is the person who is creating the trust itself, typically the estate owner. The grantor then has to name a trustee. This is the person who is going to manage the trust itself. Finally, make sure to name a few beneficiaries. These people will receive the assets of the trust once the owner of the estate passes away. It may be a good idea to name more than one beneficiay to the trust, just in case the beneficiary predeceases the grantor.

How Does an Insurance Trust Work?

When someone sets up an insurance trust, the trust owns the insurance policy instead of the creator of the trust. Since the person no longer owns the insurance benefits, the benefit is excluded from the person’s estate. Therefore, the total value of the estate is reduced, as are the insurance benefits. Since the trust owns the insurance policy, and not the individual, that person’s taxes are reduced because the insurance policy can no longer be taxed as part of the individual’s estate. The amount that the taxes are reduced by will change with the value of the estate. Furthermore, some people may not even need the help of a life insurance trust to reduce the estate taxes that they owe. People should seek the help of an experienced estate planning attorney to ensure that their estate taxes are minimized as much as possible. An estate planning or a tax attorney can provide guidance to an individual on how to organize their assets in their estate in a way that is financially beneficial to them.

** Note: This article is not meant to be taken as any form of legal advice. This is purely informational. For questions please contact your attorney, or schedule an appointment with Vilar Law directly.

Article updated October 2, 2020.