Articles Tagged with Irrevocable Life Insurance Trust

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.

Many individuals – especially those with children – do not want to think about what would happen to their family if they passed away. Although many people have life insurance to cover the cost of raising a child in the event of their untimely death, they do not think about establishing a trust to hold the money for them. Despite the common misconception, trusts are not just for the rich. Rather, they are critical tools for young families and an important part of a comprehensive Houston estate plan. Below are some of the common questions that individuals have about life insurance trusts.

How Does a Life Insurance Trust Work?

Individuals will set up a trust as part of their overall estate plan, typically, when they are creating a will and naming guardians if they have minor children. A trust holds assets – including property and money – for the listed beneficiaries, and the individual creating the trust details how the assets should be utilized. Additionally, the person appoints a trustee to oversee the process and ensure the assets are handled as written.

9.25.18The old saying that the first generation builds the business, the second generation struggles to maintain it and the third squanders everything, is sadly, statistically true. However, creating a legacy might give you better odds of success.

If you’ve been responsible and had an estate plan created, you are way ahead of most of your peers. You’ve planned for your family and your heirs with a will, powers of attorney, an advanced directive and likely created the appropriate trusts to hold life insurance policies to minimize estate taxes and protect the proceeds from creditors. You may have even done some succession planning, using family trusts and other planning vehicles. However, will this be enough for a lasting legacy?

Forbes’ recent article, “How To Turn Your Estate Plan Into A Legacy Plan,” says that perhaps you’ve heard that legacy planning is the solution to your problem.  However, you are worried about the expense. If you create a legacy plan, does it mean you’ve wasted time and money? No, it doesn’t. The documents you’ve already prepared for estate planning can most likely be used and incorporated into a more effective legacy plan. Let’s look at how to turn an estate plan into a legacy plan.

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