Life Insurance Trusts

Considering life insurance trusts? Trust Kevin C. Martin, Attorney at Law, PLLC, for guidance. Get in touch with us today for more details.


What Is a Life Insurance Trust?

Suppose you own a substantial insurance policy on your life. Without proper estate planning, the proceeds of that policy may be included in your taxable estate after you pass away. That may burden the beneficiaries of your estate with unnecessary estate taxes. 

A life insurance policy trust is one way to avoid that. In other words, it’s a trust that owns your life insurance policy, and the proceeds will not be counted as part of your estate when you die. 

However, there are different types of life insurance trusts, each with their different benefits and drawbacks. We will discuss these in this piece, along with the role of a life insurance trust and the necessary steps to establish one. 

If you want to ensure your loved ones are taken care of after your death, reach out to Kevin C. Martin, Attorney at Law, PLLC. Our estate planning attorneys can help you create a trust or any other necessary estate planning documents to protect your assets and your beneficiaries. 

Understanding Life Insurance Trusts

In general, a trust is a fiduciary arrangement. The grantor creates the trust, allowing a third party, the trustee, to manage assets or funds on behalf of the beneficiaries. A life insurance trust owns the life insurance policy it holds and its proceeds.

A life insurance trust can be revocable or irrevocable. 

The terms of the revocable life insurance trust can be changed. On the other hand, the value of the life insurance will be included in the gross estate for estate tax purposes. 

The terms of the irrevocable life insurance trust (or ILIT) can’t be revoked or changed in any way. However, the assets included in this type of trust won’t be included in the gross estate. 

Choosing between revocable and irrevocable life insurance trusts depends on your situation and estate planning goals. If you are looking to avoid or minimize estate tax, then the ILIT may be suitable for you.

The Role of a Life Insurance Trust in Estate Planning

The government levies the estate tax on estates whose value surpasses the set threshold. It has to be paid by a decedent’s estate before the estate assets are distributed to beneficiaries. The estate tax exemption threshold in DC is $4.53 million for 2023, while the federal estate tax is triggered if the estate is worth $12.92 million or more in 2023.

If you have a substantial life insurance policy and the proceeds are paid out into the estate, it may increase the value of the estate. So, a life insurance trust can be an easy way to protect your beneficiaries from having to pay the eventual estate taxes.

However, having life insurance in a trust can provide other benefits, including avoiding probate. In other words, the trust assets will not go through probate and can distributed according to your beneficiaries sooner. In most cases, the death benefit from a life insurance policy will be into the trust and then to the beneficiaries, avoiding the probate process.

Moreover, a trust will provide asset protection. With proper provisions, creditors won’t be able to file claims against the trust assets.

Setting Up a Life Insurance Trust

When setting up a life insurance trust, choosing between revocable and irrevocable trust is crucial. The grantor should also identify the right trustee and beneficiaries. 

In addition, the terms of the trust should be determined. An estate planning attorney can help draft the trust agreement in clear and legally binding language. The document must then be signed electronically or by hand. 

Funding the Trust

A life insurance trust should apply for life insurance. Existing life insurance policies can be transferred into the trust, but that may cause additional complications. If you want to exclude the life insurance amount from your estate, you’ll need to survive for more than three years from the date of the existing policy transfer. If you don’t, the proceeds will be included in your estate. Furthermore, if you gift the amount of the premium to the trust, you have to consider gift tax exemptions. You may want to consult a tax protection attorney.

A policyholder must pay insurance premiums to the insurance company to receive life insurance benefits. The trust likely won’t have funds to make the premium payments, so funds should be transferred into the trust. After the death of the grantor, the insurance proceeds will be paid into the trust, and the beneficiaries will receive the death benefit.

Advantages of a Life Insurance Trust

Here are some of the advantages of a life insurance trust:

  • Tax benefits: Using this type of trust will help lower your taxable estate if it exceeds the thresholds for state or federal estate taxes.
  • Asset protection: Life insurance trusts are not subject to claims by creditors or other parties.
  • Avoiding probate: By using a life insurance trust, you can bypass the probate process. 

Key Considerations and Potential Drawbacks

However, a life insurance trust also has certain drawbacks.

  • Irrevocability and losing control: if you are setting up an irrevocable life insurance trust, you can’t change its terms and will lose control over the policy after transferring it into the trust. If you want to retain control and set up a revocable trust, you may need to go through legal proceedings. 
  • Funding and maintenance expenses: Besides paying premium payments to the life insurance company, you may also have to pay the required fees to set up and maintain the trust. 

Need More Help? Contact Us Today!

It’s rarely pleasant to talk or think about death. But, if you die without a will or a trust in place, your estate will be distributed according to intestate succession laws, which may not suit your wishes. To control who can inherit your assets, how, and when, you need an estate plan. 

Be careful. Estate planning should be done properly and in accordance with the law. If your estate is subject to the estate tax, know that the federal estate tax rate can be a staggering 40% on your net assets. That means a large sum of money may have to be paid to the government before your beneficiaries can get their shares. 

The life insurance trust can be a good solution if you don’t want to avoid or minimize your estate taxes. But you’ll probably need the help of an estate attorney since this is not a do-it-yourself kind of trust. 

Kevin C. Martin, Attorney at Law, PLLC, may be able to help with creating the trust, as well as protecting your assets from excessive taxes. We offer a personalized approach to estate planning.

Our attorneys possess decades of combined experience and deep knowledge of DC and federal laws on estate planning. We will do our best to ensure the longevity of your family’s wealth.

Contact us today to schedule your free consultation!