There is no easy answer as to whether a life insurance policy should be put into a trust. The best answer is that it depends on your individual situation, the size of your estate, and what type of trust you are considering.
For example, if you're single, and your net estate, which is your assets
minus debts, is less than $1 million dollars, you may not need a trust,
or you may want to put your life insurance into an irrevocable life
insurance trust (ILIT). If you're married and your net estate is less
than $2 million dollars, you may choose either a living trust, an
irrevocable life insurance trust, or no trust at all.
There are two types of trusts that I will discuss; a living trust or an
irrevocable life insurance trust. There are benefits and drawbacks to
both trust instruments.
A living trust is an estate planning tool that allows you to manage your
assets while you are alive and pass them down to your family upon your
death without the need for probate proceedings.
A living trust has a Trustor (also called Grantor), which is the person
who owns the trust and transfers property into it. A trustee is the
person who receives the assets on behalf of the Trustor. It is possible
with a living trust, to be both the Trustor and the Trustee. There is
also a beneficiary which is the person or persons who benefit from the
terms of the trust. Since this is a living trust, you can be the primary
beneficiary during your lifetime, therefore making you the Trustor,
Trustee, and the Beneficiary.
In addition, living trusts normally have instructions for managing the
assets during your life, and instructions on what happens when you die.
A living trust is revocable. This means that you can change, amend or end the living trust at any time during your life.
Because right now there are no estate taxes on an estate worth less than
$1 million if you are single, and less than $2 million if you are
married, a living trust may be a good place to put your life insurance
policy. But there is another option.
An irrevocable life insurance trust is an estate planning tool designed
specifically for life insurance polices. If you have a substantial net
estate that is going to be subject to estate taxes, an irrevocable life
insurance trust might be a good option. Because a life insurance policy
placed in an irrevocable life insurance trust no longer belongs to you,
it can not be included in your taxable estate.
There are some major drawbacks to an irrevocable life insurance trust.
For example, once an irrevocable life insurance trust is created it
cannot be changed, amended, nor ended during your lifetime.
Secondly, you cannot change the beneficiary of your life insurance
proceeds in an irrevocable life insurance trust. So, for example, if
your spouse is the named beneficiary in your irrevocable life insurance
trust, and you got divorced, your ex-spouse would still be entitled to
your life insurance proceeds.
Also, if you have an existing life insurance policy and place it in an
irrevocable life insurance trust, but die within 3 years of the transfer
date, the trust will not be protected from estate taxes.
The truth is once you have an irrevocable life insurance trust you are
committed to it for life, there's no turning back. If you're not sure
you want this life insurance policy the rest of your life, than an
irrevocable life insurance trust may not be the way to go.
The bottom line is this: if you are thinking about putting your life
insurance policy into a type of trust instrument, you will want to
consult with your accountant, financial planner, and/or an experienced
attorney. The laws regulating certain trusts vary from state to state,
so you might want to make sure you have all the facts before entering
into such a document.
Each individual's financial situation is different, so it might be wise
to gather all the information you need to make an informed decision and
then decide if you need to speak with a qualified professional.
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