Life Insurance Trust

A Life Insurance Trust is often chosen because it allows a grantor to exclude their life insurance from their taxable estate.  In addition, a Life Insurance Trust, can assist your heirs by providing them with an immediate influx of un-taxable cash, as well as helping to pay estate fees.  The proceeds from the deceased grantor’s life insurance policy may be used to pay any estate costs after the grantor dies and provide the beneficiaries with tax-free income.

A Life Insurance Trust is a legal document that is hold life insurance on the life of the grantor.  As I mentioned previously, the main benefit of a Life Insurance Trust is that it removes the life insurance proceeds payable on the death of the grantor from being taxed.  As you can imagine—given the size of many people’s life insurance policies—that amount could be sizable.

The life insurance policy’s death benefits are included in the grantor’s estate for federal estate tax purposes because the grantor has the right to designate the beneficiary of their choosing to receive the death benefits upon the grantor’s death.

A Life Insurance Trust is always an irrevocable living trust; for this reason, it is also commonly known as an Irrevocable Life Insurance Trust.

To exclude a life insurance policy from the assets of an estate estate, the grantor must relinquish ownership rights, ensuring that the grantor may not borrow against the policy, nor change beneficiaries.  Remember, the Trust is an irrevocable one.

When might a Life Insurance Trust be beneficial?  When a grantor wants to leave beneficiaries an asset that can’t quickly be converted into cash, such as real estate or businesses.  In cases where the late grantor’s assets would have to be liquidated before they could be used, a grantor often chooses to set up a Life Insurance trust, so his beneficiaries will be taken care of in the meantime while awaiting the sale and liquidation of the larger assets.  In this instance, a Life Insurance Trust would allow the heirs to survive financially and pay their cost-of-living expenses or the operating expenses of the business until it can be sold.

To determine if a Life Insurance Trust could be right for you and your beneficiaries, please consult a qualified estate planning attorney.

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