Who Should Set Up a Life Insurance Trust?

The primary purpose of a life insurance trust is to hold a life insurance policy to provide liquidity upon death. Additionally, life insurance trusts can provide significant advantages when it comes time for your heirs to pay estate tax.

With these two major benefits in mind, the following groups of people might consider a life insurance trust:

  • small business owners
  • people with large life insurance policies
  • investors who hold life insurance policies as part of an investment strategy

How Does a Life Insurance Trust Work?

In the eyes of the IRS, life insurance is not taxable as income during life, but it is taxable as part of one’s estate after death. In a life insurance trust, a policy is placed into a trust and ceases to be the property of the grantor, even if the policy is taken out on the grantor’s life.

A life insurance trust is irrevocable, meaning it cannot be altered once it is set up, except with the consent of the beneficiary in some cases. In light of this, careful planning is needed to account for the unique circumstances of the person or family setting up the trust.

Unique Applications of Life Insurance Trusts

As listed above, life insurance trusts are flexible estate-planning tools that can benefit people in many different circumstances. All of these benefits stem from the estate tax savings that come from sequestering a life insurance policy in a trust.

For people with large life insurance policies, or people who hold term life insurance policies as part of an investment strategy, the benefit of setting up a life insurance trust is fairly straightforward: the savings on estate tax are significant.

For small business owners, the benefit is more indirect. Upon a business owner’s death, a life insurance policy stretches further when not subject to estate tax. The liquidity provided by a life insurance payout can be essential to keeping a business in a family or keeping a business afloat. This payout can help pay off taxes on the non-exempt estate.  In cases where there are other business partners, the life insurance money can be used to buy out these partners and keep the business in the family.

Setting Up a Life Insurance Trust through Gosselin Law

Life insurance trusts can be an important part of your estate planning. To discuss if a life insurance trust might be right for you schedule an appointment with our office today. We can discuss you and your family’s particular circumstances and needs. Together, we can design a plan to optimize your plans for your estate.

We know our community; we know trusts; we want to get to know you.

The Power of Trusts
A guide to trusts for asset protection, estate tax avoidance, and legacy management

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