Is A Life Insurance Trust Worth It?

Regarding estate planning, trusts are the most effective tools for securing your family’s financial future. They are a legal arrangement involving a trustee who is granted the ability to manage assets on behalf of your beneficiaries.

Trusts can be funded with all types of assets, from cash to real estate, and even life insurance policies. If you create a life insurance trust, you can provide money to your chosen beneficiaries after you pass away.

This is a great option if you have minor children or dependents and you want to ensure they’re well taken care of on your terms after your death. 

How To Create A Life Insurance Trust

Creating this type of trust involves a variety of steps, including:

1. Determine The Type Of Life Insurance Trust

A life insurance trust can be revocable and irrevocable. Which one you choose will depend on your estate planning goals and your financial status.

An irrevocable life insurance trust is used for holding and managing a life insurance policy, but it can’t be canceled or modified after being set up. Sure, you may need to sacrifice some flexibility, but you will also be able to avoid estate taxes and creditor claims, practically allowing you to shield the assets for the benefit of your beneficiaries.

A revocable type, on the other hand, can be changed or revoked at any time. This means you retain control over the life insurance policy while you’re alive, but it also becomes a part of your estate after you pass away. As such, it will be subject to creditor claims and estate taxes.

2. Select Your Beneficiaries

After deciding on the type of trust, you must choose who benefits from the life insurance policy. You can select multiple family members and decide how much of the proceeds they’ll receive. 

The trust also allows you to specify how the funds are allowed to be used, and decide on the terms the beneficiaries might have to fulfill before they’re allowed to access their portion of the funds.

3. Calculate The Amount Of Insurance

You also need to calculate the amount of life insurance you’ll have to purchase. The amount will depend on your future finances. For instance, if you have minor children, you can purchase more coverage so the trust can cover their future education needs. You may also need to account for a variety of other factors such as inflation, taxes, and the costs of administering the trust.

4. Choose The Right Type Of Insurance Policy

For a life insurance trust, most experts recommend using a permanent life insurance policy. 

However, if you’re concerned about the costs, you may be able to use a term life insurance policy. While it can be beneficial, there’s a risk of you outliving the term level period, which will set you back financially when you start the renewal process.

5. Purchase The Policy

Look around for quotes, but also pay close attention to any fees and more importantly, the growth rate of the cash value. High fees could minimize your assets, so you shouldn’t take this part of the process lightly. 

6. Transfer The Ownership Of The Life Insurance Policy To The Trust

To finally establish a life insurance trust, you’ll need to transfer the life insurance policy’s ownership to the trust. 

This requires signing an insurance company document and providing the basic trust information. To be on the safe side, ask an estate planning attorney for help, as they can make certain that all the paperwork and legal documentation is filed correctly. 

Benefits Of A Life Insurance Trust

Aside from peace of mind, there are plenty of benefits of establishing a life insurance trust, such as:

• Estate tax reduction: when you fund a trust with a life insurance policy, the death benefit won’t apply to the grantor’s estate. It also won’t be subject to estate taxes unless the grantor passes away within three years of establishing the insurance policy.
  
  
• No income taxes: beneficiaries aren’t required to pay any taxes on proceeds from a life insurance trust.
  
  
• Asset protection: funds in the life insurance trust aren’t subject to judgments and creditor claims.
  
  
• Probate avoidance: life insurance trusts automatically bypass probate
  
  
• More control over the distribution of assets: with a life insurance-funded trust, you get to decide how the payout is used and distributed.
  
  
• Provide liquidity: this type of trust can provide liquidity necessary for larger estates to pay off any estate taxes. This helps them avoid dissolving other assets such as real estate or vehicles.

Drawbacks Of A Life Insurance Trust

Despite its strengths, there are a few noteworthy drawbacks to using a life insurance trust, including:

• Substantial fees: setting up and managing a life insurance trust is associated with relatively steep legal fees.
  
  
• No control: when you set up an irrevocable trust, you completely lose control of how the assets will be used and distributed.
  
  
• Lookback period: if you pass away within three years of setting up this legal instrument, it may end up included in your estate, which negates most of the benefits of life insurance trusts. 

Alternatives To Life Insurance Trusts

There are plenty of other funding options at your disposal if you’re not interested in funding a trust with life insurance.

For example, you can transfer a set sum of money to a savings account each month and designate it for a trust. You can also do the same with investments through stocks or mutual funds. 

Lastly, you can fund the trust with real estate. This is especially useful if you have a property you’re not actively using but don’t want to sell. 

Set Up An Effective Estate Plan ASAP

Using life insurance trusts helps facilitate a smooth transition of funds to the next generation, and thus helps provide you and your family with the well-needed peace of mind.

Whether it will benefit you depends on your financial circumstances. This is why you should contact an estate planning attorney before making any long-term commitments.

Attorneys at Doane & Doane are always ready to help Florida families create effective estate plans, and have been doing so for the last two decades. By taking into account your family situation and financial needs, we’ll provide you with guidance on the most effective estate planning tools that can help you fulfill your goals and potentially help you maximize your wealth. 

Learn more about what we offer - call 561-656-0200 or fill out our contact form.

Note: 

The information in this blog post is for reference only and not legal advice. As such, you should not make legal decisions based on the information in this blog post. Moreover, there is no lawyer-client relationship resulting from this blog post, nor should any such relationship be implied. If you need legal counsel, please consult a lawyer licensed to practice in your jurisdiction.