The Basics of a Life Insurance Trust

Life insurance allows you to provide financially for your family after you die. It’s an important part of your estate plan, 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 will pay estate tax on that money if your estate value exceeds $5.49 million.  

Establish a life insurance trust to protect your life insurance policy’s death benefit from estate taxes. This trust can save your beneficiaries thousands of dollars and gives them the maximum benefit of your life insurance policy.

What to Consider Before you Open a Life Insurance Trust

A life insurance trust is a wise investment, but consider several facts about this arrangement before you establish a trust.

Carefully choose the beneficiary.

You can change your life insurance policy beneficiary any time. However, the beneficiary of your life insurance trust cannot be changed, so choose your life insurance trust beneficiary carefully.

Purchase a new life insurance policy for the trust.

If you transfer an existing life insurance policy to the trust and die within three years, that life insurance policy will be considered part of your estate and will be taxed as such. Avoid taxes when you purchase a new policy specifically for the life insurance trust.

Remember that the life insurance trust is irrevocable.

After you set up a life insurance trust, you cannot undo it. So if you become uninsurable, remember that you cannot retrieve the life insurance policy or make any changes to it.  

You can't borrow from the policy.

You will probably purchase a whole or permanent life insurance policy for your trust since it remains in effect until your death. This type of life insurance policy accumulates cash value. You won’t be able to borrow from it, though, because it belongs to the trust and not to you personally. The cash value simply accrues for the trust beneficiary.

Find or hire a trustee.

You can’t serve as the trustee of your life insurance trust, so find or hire someone you trust to take on this responsibility. You may also hire the bank or trust company to handle this task. They usually charge a reduced fee because the trust requires no investment decisions and little effort.

Maximize your life insurance policy for your beneficiaries when you establish a life insurance trust. It ensures they receive 100 percent of the benefits and gives you peace of mind.
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