The ‘Magic’ Life Insurance Trust

A life insurance trust is a trust that can buy life insurance policies on the person who establishes the trust (called the grantor), the grantor’s spouse or the trust beneficiaries. The trust owns the insurance policy and collects death proceeds when you die. A trustee — whom you choose to carry out your wishes — distributes the benefits to the beneficiaries according to the terms in the trust document, which identifies who the beneficiaries are, how and when they may receive distributions, and how the money may be invested.

Beneficiaries can be individuals, institutions, trustees or an estate. By naming beneficiaries, you ensure that your assets go where you want them to.

There are revocable and irrevocable trusts. When it is revocable, that means you may make changes or revoke it. An irrevocable trust means you may not revoke, alter or amend the trust once it has been established.

You may establish a life insurance trust to:

• Provide security for your loved ones after your death, while still maintaining some control over how the proceeds are invested and distributed to your beneficiaries.
• Provide liquidity to your estate to pay debts and obligations.

If it’s a revocable trust and you are the trustee, death proceeds could be reduced significantly in paying estate taxes. That’s why many life insurance trust purchasers keep the death benefit out of their taxable estate: to reduce or even eliminate estate taxes so more of your assets go to your heirs. (Of course, you need to consider whether your estate is large enough to make estate taxes an issue for you.)

Naming your trust as beneficiary gives you more control to:

• Provide immediate cash to pay taxes and expenses.
• Reduce estate taxes by excluding life insurance proceeds from your estate.
• Avoid delays and legal fees associated with probate.
• Ensure proceeds are received free from income and estate taxes.
• Control the policy and how proceeds are used after you’re gone.
• Provide income to your significant other without insurance proceeds being included in your spouse’s estate.

A trust can also help if it turns out that a beneficiary is incapacitated when you die. Typically, an insurance company will not pay out to anyone declared “incompetent,” and that means the courts will get involved, which could mean a time-consuming and expensive process. But if the trust, rather than the individual, is the beneficiary of the policy, the trustee can use the proceeds to provide for the incapacitated loved one and the estate can likely avoid court intervention.

Trusts can also be of great use if you are worried about how beneficiaries will spend their money. Will they quickly fritter away a lump sum payment that is supposed to last them for the long term? A spendthrift provision can pay your heirs a monthly “allowance” for living expenses, for example. Such a clause may also protect a payout from creditors.

An insurance trust, in any form, is not necessarily right for everyone. We’d be happy to discuss whether it, or another tool, might be right for you.

Read our past article, “How To Protect Your Money From Medicaid”

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This website is not intended to be a source of solicitation or legal advice. General information is made available for educational purposes only. The information on this blog is not an invitation for an attorney-client relationship, and website should not be used to substitute for obtaining legal advice from a licensed professional attorney in your state.   Please call us at (626) 403-2292 if you wish to schedule an appointment for a legal consultation.

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William Hayes

As an attorney in private practice in Los Angeles County, California William Hayes provides extensive estate and tax planning services to individuals and businesses in Los Angeles, Pasadena, Glendale, Burbank and surrounding communities. Attorney Hayes’ primary focus is to help clients avoid probate, protect their assets, and provide for the security of their loved ones with a well-crafted estate plan. He believes in giving each client the time needed to explain his or her needs and wishes and then dedicates his efforts toward making the client’s desires clear in their final estate plan.

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