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Sunday, October 31, 2021

What Is a Life Insurance Trust?

A life insurance trust is a special kind of trust designed to avoid some of the estate tax problems that can arise when a decedent owned a life insurance policy that did not name someone else as the beneficiary of the proceeds. There are good reasons in some situations to have life insurance with the estate as the beneficiary.

A Florida estate planning attorney can set up a life insurance trust and answer your questions, like, “What is a life insurance trust, and is a life insurance trust a good option for me?”

Why You Might Want to Have a Life Insurance Trust

Life insurance is a relatively inexpensive way to provide money for your loved ones when you are no longer alive to support them. People often buy a life insurance policy to pay for college for their children or pay off the mortgage when they die to ease the financial burden on the surviving family members.

In those situations, the policy owner often names one or more individuals as the beneficiaries of the policy proceeds. When the insurer pays the proceeds directly to someone else instead of the decedent’s estate, the money does not count as an estate asset, so the funds do not count for purposes of estate tax.

Sometimes, however, a person might want ready cash to go directly to the estate to pay estate expenses, like the final medical bills, funeral costs, estate administration fees, taxes, and other expenses. Without a source of liquid funds like life insurance proceeds, there would be less money to distribute to the heirs.

The problem arises when the estate assets, including the life insurance proceeds, exceed the estate tax exemption amount. In this situation, an irrevocable life insurance trust (ILIT) can help the estate sidestep the issue.

How Does a Life Insurance Trust Work?

When you have a life insurance trust, the trust owns the life insurance policy, not you. Just as with other types of trusts, a life insurance trust must hold title to the asset. The trust is also the beneficiary of the policy.

The grantor (the person who set up the trust) leaves instructions about how the trustee should manage the life insurance proceeds. Upon the grantor’s death, the insurance company pays the policy proceeds to the trust. The trustee then makes the distributions according to the directions the grantor created when setting up the trust.

What Are the Disadvantages of a Life Insurance Trust?

You cannot change your mind after you set up an irrevocable trust, whether it is an irrevocable life insurance trust or some other kind of irrevocable trust. Once you create an irrevocable life insurance trust, you cannot add, remove, or substitute beneficiaries. You cannot get the life insurance policy back from the trust or transfer the insurance policy to someone else. You cannot cancel the insurance policy or change the instructions to the trustee. Also, the trustee must be a third party.

As long as these restrictions are not a deal-breaker for you, an irrevocable life insurance trust could be a smart decision. Too often, the surviving family has to sell a significant asset, like the family farm, vacation property, or business, to pay the estate taxes and other estate expenses.

If you would like to explore whether an irrevocable life insurance trust should be a part of your estate plan, you might want to talk with a Florida estate planning attorney. Call our office today to set up a consultation.


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The Law Office of Jeffrey A. Herzog, P.A. assists clients in Florida, including North Pinellas County, Palm Harbor, Trinity, West Pasco County, and the surrounding areas.



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| Phone: (727) 789-4000

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