First Christian Church

Benefits Of Planning A Life Insurance Trust

By Simon Volkov

Planning a life insurance trust is a smart estate planning strategy that aids in reducing or eliminating estate taxes. Policy proceeds are paid directly to the estate trust and therefore, tax-exempt. Irrevocable life insurance trusts offer added protection to provide benefits to the surviving tax without creating tax consequences for the estate.

Setting up a life insurance trust involves working with a certified estate planner. The process is multi-faceted and involves documenting information about estate assets; establishing a trust to hold the insurance policy; selecting a Trustee to perform management duties; and writing a last will and testament.

Essentially, a trust is a safe deposit box that safeguards estate assets. Insurance policies are held within the trust and managed by a Trustee. When the policy holder passes away, Trustees perform estate settlement duties required to transfer assets to beneficiaries appointed within the last will and insurance policy.

For most, the Trustee is their spouse, relatives, or trusted friend. Other people prefer to appoint a financial advisor, lawyer, or tax accountant. Policyholders maintain control of establishing beneficiaries and the amount of money given to each person. However, in the case of irrevocable trusts, once terms are established they cannot be changed without court approval.

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There are advantages and disadvantages to these types of trusts. One major advantage is reduction or exemption of estate taxes. Another is this method bypasses the probate process. The primary disadvantage is altering irrevocable trusts can be nearly impossible. It’s vital to give careful consideration to the people included; especially those chosen as Trustees.

It’s strongly recommended to talk to the people you want to serve as your personal representative. A lot of people don’t want the added responsibility, while others may not be able to meet the demands required to tackle the job.

Other important considerations are deciding on beneficiaries to receive insurance proceeds and how the funds will be disbursed. Proceeds can be paid in whole or via partial distributions. Policyholders can establish payments schedules as monthly, quarterly, semi-annually, or annually. Furthermore, lump sum distributions can be arranged to gift money when beneficiaries achieve life milestones like getting married or graduating from college.

When beneficiaries receive government assistance, such as Social Security Disability Insurance, policyholders can gift smaller payments. This strategy helps to avoid interfering with the assistance funds they are entitled to.

When irrevocable life insurance trusts are setup, policyholders can provide beneficiaries with tax-exempt financial gifts up to $11,000 annually or $22,000 to married couples. Financial gifts can be established for as many beneficiaries as the policyholder can afford to fund.

As long as financial gifts do not exceed IRS limits, recipients are not required to pay gift tax. It is always best to work with a tax attorney to assure gifts are in compliance with IRS guidelines.

A final consideration of life insurance trusts is they must comply with Crummey Powers. This ruling stems from a famous court case involving a man named Clifford Crummey. Essentially, insurance companies are required to provide beneficiaries with a Crummey Letter when annual premiums are deposited by the policyholder.

Beneficiaries are given a set amount of time to withdraw funds. The goal is to keep money in the account so there will be a larger distribution upon the policyholder’s death. In order for funds to remain tax-free requires issuing the letter and giving beneficiaries the option to withdraw funds on an annual basis.

While setting up a life insurance trust can be a complex process, they offer substantial protection and are a good way to provide money to loved ones for many years. As long as you work with professionals they aren’t nearly as complicated as they appear.

About the Author: Simon Volkov is a real estate investor that specializes in buying probated estate assets. He shares an extensive article library to help visitors learn about available options. Topics include tips for writing Will, arranging a

life insurance trust

, and reducing estate taxes at



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