Life Insurance Trusts

Life insurance trusts offer a strategic approach to asset protection and estate planning. By placing a life insurance policy within a trust, it becomes separate from your estate, potentially reducing estate taxes and providing financial security for your beneficiaries. This arrangement ensures that the proceeds of the policy are managed according to your wishes, offering a layer of protection and control over these assets. For individuals seeking a method to safeguard their legacy, life insurance trusts present a compelling option.

What Is a Life Insurance Trust?

An Irrevocable Life Insurance Trust (ILIT) is a specific type of trust created to own and manage a life insurance policy. This arrangement serves an important role in estate planning, as it effectively separates the life insurance policy from the insured individual’s estate. When you transfer the ownership of your life insurance policy to the ILIT, upon your demise, the policy’s proceeds are paid out to the trust instead of your estate. This separation plays a significant role in reducing your estate’s tax liability since the life insurance proceeds are not considered part of your taxable estate.

Additionally, an ILIT offers substantial benefits in terms of control and distribution of the insurance proceeds. By setting up an ILIT, you can dictate specific terms on how and when the proceeds will be disbursed to your beneficiaries. This feature is especially advantageous for those who wish to have detailed stipulations regarding the use of the insurance proceeds, such as providing for minors, managing spendthrift beneficiaries, or ensuring funds are used for specific purposes. In this way, the ILIT can be a powerful tool in both tax planning and in achieving personal objectives in your estate plan.

Benefits of a Life Insurance Trust

  • Estate Tax Reduction: Life insurance trusts help minimize estate taxes. By owning the life insurance policy, the ILIT ensures that the death benefit is not included in your estate, thereby reducing the overall estate tax liability. This is particularly beneficial for estates that are close to or exceed the federal estate tax exemption limit.
  • Control Over Policy and Proceeds: An ILIT provides you with the ability to control the disbursement of life insurance proceeds. You can set terms and conditions for distribution, ensuring that the funds are used as per your wishes. This is especially useful for managing distributions to minors or beneficiaries who may not be financially savvy.
  • Protection Against Creditors: Assets within an ILIT, including the life insurance proceeds, are generally shielded from creditors. This protection is crucial in safeguarding your beneficiaries’ interests, ensuring that the proceeds are not seized for debt repayment, legal judgments, or divorces.
  • Long-Term Security for Beneficiaries: By setting up an ILIT, you can provide long-term financial security for your beneficiaries. The trust can be structured to provide regular distributions or to hold funds for future needs like education, healthcare, or retirement, thereby supporting your loved ones over an extended period.

How We Can Help You Set Up a Life Insurance Trust

At Surprenant & Beneski, we create tailored estate plans, including the setup of Life Insurance Trusts. We understand that each client’s situation is unique, and our approach is to listen carefully to your needs and objectives. Our experienced attorneys guide you through every step of establishing an ILIT, from selecting the right policy to ensuring the trust aligns with your overall estate plan. We handle the intricate legal processes and paperwork, providing you with the assurance that your life insurance policy will be managed effectively to benefit your loved ones according to your wishes. 

The Process of Funding and Managing a Life Insurance Trust

  • Establishing the Trust: The first step in funding a Life Insurance Trust is establishing the trust itself. Our team assists you in creating the trust document, which outlines how the trust will operate, and then helps transfer ownership of your life insurance policy to the trust. This is an important legal step to ensure that the trust is the policy owner and beneficiary.
  • Paying Premiums Through the Trust: Once the life insurance policy is transferred to the trust, future premiums must be paid by the trust. We guide you in transferring funds into the trust for premium payments. 
  • Annual Crummey Notices: For the trust to maintain its tax advantages, beneficiaries must be given the right to withdraw contributions for a limited period each year, known as Crummey powers. We manage the process of sending out these annual Crummey notices to beneficiaries, ensuring legal compliance and preserving the trust’s tax benefits.
  • Ongoing Trust Management: Managing a Life Insurance Trust involves regular reviews and updates to reflect any changes in your life circumstances, tax laws, or estate planning goals. Our firm provides ongoing trust management and advisory services to ensure that your trust continues to align with your estate planning objectives and operates efficiently for the benefit of your beneficiaries.

Contact an Experienced Life Insurance Trust Attorney

At Surprenant & Beneski, we are dedicated to understanding and meeting your specific estate planning needs, including the setup of Life Insurance Trusts. Reach out to us for thoughtful guidance and support in securing your legacy and ensuring the well-being of your loved ones.