People know the inherent benefits of having life insurance. They also know the need to have an estate plan in place. However, not many individuals know that life insurance can be utilized within an estate plan to benefit a person’s loved ones after their passing. For families in Houston, this can maximize their wealth to take care of the people they love most—even after their death. For many, the preferred method to use a life insurance policy in an estate plan is to establish an irrevocable trust, which can allow the benefit to be transferred to loved ones after the person’s death without tax implications. By creating a life insurance trust, individuals transfer ownership of the life insurance policy to the trust.
Building an irrevocable trust may seem like a complicated process, but with the help of an estate planning attorney, the trust can be created with ease. The first step is to establish the trust, where the life insurance policyholder names another party to serve as the trustee. The trustee uses the assets in the trust to pay life insurance premiums. After the creation of the trust, the trust itself “owns” the life insurance policy until the person’s death. It is important to note that the trust is irrevocable, meaning the individual cannot change the terms of the trust after it has been established.
While this option may seem strange for many, there are inherent benefits to doing so. For one, turning the life insurance policy into an irrevocable trust has a tax advantage. The proceeds that beneficiaries receive from this trust are generally excluded from the beneficiary’s gross income. Since the trust technically “owns” the life insurance policy, it is not an asset that would be taxed like normal inheritance would be. Beyond the tax advantages, a life insurance trust provides a guaranteed source of income for loved ones. As long as a beneficiary—a loved one or close friend who the individual wants to receive the funds—is named on the policy, the benefit proceeds are directly paid out to the beneficiary without going through the probate court process. This speeds up the process so the heirs can use the funds to pay for immediate costs, like estate taxes or funeral expenses—if necessary.