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304 North Cardinal St.
Dorchester Center, MA 02124
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Life insurance can help you financially protect your dependents and loved ones who rely on you. Your policy’s death benefit can help provide for your family if you suddenly pass. But what if the death benefit must pass through a lengthy probate process? What if you want to avoid or minimize estate taxes so your heirs have more funds at their disposal?
In scenarios like these, you may want to support those you leave behind even more with a trust. A life insurance trust, often called simply an insurance trust, is a trust you fund with life insurance that ensures your death benefit is paid out to your beneficiaries in whatever fashion or timeline you wish.
There are two types of life insurance trusts: irrevocable life insurance trusts (ILITs) and revocable life insurance trusts (RLITs). Both types of trusts allow your trustee to distribute funds from the trust to specific beneficiaries according to your directions. Generally, this setup is preferable to a non-trust arrangement, in which your property goes through probate court, which can be a lengthy and expensive process.
Irrevocable Life Insurance Trusts (ILIT) | Revocable Life Insurance Trusts (RLIT) |
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Changes are forbidden once the trust is established. | Changes are allowed as needed by the grantor (usually the policyholder). |
The trust owns all assets included within it. | The insured controls the trust and its assets. |
Federal estate taxes may be avoided if the estate’s value doesn’t exceed the 2024 federal limit of $13.61 million. An estate will be taxed on amounts that exceed this threshold. State tax liabilities vary by state, but 33 states don’t impose estate tax. | Since the insured retains control of trust, it may be subject to taxes. |
Creditors may not pursue assets as debt payment except in cases of fraud. | Creditors may pursue assets for debt collection depending on your state laws. |
Follow these steps to set up a life insurance trust to help ensure your policy’s death benefit and financial assets are allocated according to your plan.
Legal software is available for do-it-yourselfers to set up a life insurance trust. This option may be sufficient for someone with a more moderate estate and minimal asset distribution needs. However, you may prefer working with an estate attorney to guide you through the process and address potential future issues you might not have considered.
Assign a trustee for the life insurance trust you can rely on to execute the details of your estate plan. Before finalizing your trust, discuss your estate wishes with this person and make sure they agree to serve as trustee. Your plan will also require you to name your beneficiaries, whether they are people or organizations. Finally, appoint a financial manager to oversee the inheritance for any beneficiaries who are minors.
Although legal software can help you set up your life insurance trust, it’s generally recommended to work with an estate planning attorney to create your documents. An attorney with experience establishing life insurance trusts can help you design a trust customized to your unique financial needs and make sure the documents are filed correctly.
Since life insurance trusts are funded by a life insurance policy, look for a term or whole life insurance policy that provides sufficient coverage for your beneficiaries. Also, determine the appropriate amount of life insurance you need so your loved ones can financially survive once you pass.
Setting up a life insurance trust may be worth it because it can help you transfer wealth to your heirs in a tax-efficient way. Instead of leaving your estate to the whims of the probate process, a trust can help ensure your plans for your property and assets are distributed according to your wishes.
Understandably, making end-of-life plans may not be your idea of fun, but your heirs will appreciate having a clear plan to secure their financial future and avoid potential legal issues. Consider working with a financial advisor or estate planning attorney to design a plan that best serves your unique needs.
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