Life insurance allows you to provide financially for your family after you die. It’s an important part of your Life Insurance for Estate Creation, and you can maximize the death benefit and care for your family’s future when you set up a life insurance trust.
What is a Life Insurance Trust?
When you die, your beneficiary will receive the death benefit of your life insurance policy. While the benefit is not subject to income tax, your beneficiary may owe estate tax on that money if your estate value exceeds the applicable exclusion amount.
Establish a life insurance trust to protect your life insurance policy’s death benefit from estate taxes and legal exposure. A properly drafted trust can save beneficiaries thousands and preserve more of the policy’s proceeds for your heirs.
What to consider before you open a life insurance trust
A life insurance trust can be a smart component of an estate strategy, but there are several practical and legal points to consider before you establish one.
Carefully choose the beneficiary
You can change the beneficiary of a life insurance policy at any time, but the beneficiary named in a life insurance trust is fixed by the trust terms. Choose the trust beneficiary carefully since changing that designation later is typically not possible.
Purchase a new life insurance policy for the trust
If you transfer an existing policy into an irrevocable trust and die shortly after the transfer, the proceeds can sometimes be included in your taxable estate. To avoid that risk, many people purchase a new policy in the name of the trust instead of transferring an owned policy.
If you are shopping for coverage to place in a trust, consider options and underwriting requirements and see Individual Life Insurance for more information on policy types and purchase steps.
Remember that the life insurance trust is irrevocable
Most life insurance trusts are irrevocable, meaning they cannot be altered or revoked after they are signed. If you later become uninsurable, you cannot retrieve the policy or change its ownership once the trust is in place.
You can't borrow from the policy
Trust-owned policies are often whole or other permanent policies that accumulate cash value. Because the policy belongs to the trust, you cannot borrow against that cash value personally; any value accrues for the trust beneficiaries.
Find or hire a trustee
You cannot serve as the trustee of your own irrevocable life insurance trust, so appoint someone you trust or hire a professional trustee. Banks or trust companies often charge modest fees for administering a simple life insurance trust since it usually requires limited ongoing work.
Maximize the benefit to your beneficiaries by setting up a trust carefully and reviewing ownership and beneficiary designations with qualified advisors. If you want to review your options or finalize a trust-based purchase, talk to an agent who can guide the application and ownership steps.
Frequently Asked Questions
Will a life insurance trust reduce estate taxes?
A properly structured irrevocable life insurance trust can keep the policy proceeds out of your taxable estate, which may reduce estate tax liability for your heirs.
Can I transfer an existing policy into a trust?
You can transfer a policy, but transfers shortly before death may cause the proceeds to be included in your estate; many people buy a new policy owned by the trust to avoid that risk.
Who should I name as trustee?
Choose a trustworthy individual or a professional fiduciary such as a bank or trust company; the right choice depends on the complexity of the trust and your family situation.
Can I change the trust beneficiary later?
No, beneficiaries under an irrevocable life insurance trust are generally fixed by the trust terms and cannot be changed after the trust is executed.