A life insurance trust allows a person to have control over his or her life insurance policy and how the proceeds are distributed to the beneficiaries he or she named. In a trust, the grantor is the creator of the trust, the trustee is the person who is responsible for making decisions according to the grantor’s wishes and the beneficiary is the person who receives the benefits of the insurance policy.
With a life insurance trust, the trust owns the life insurance policy. When the grantor passes away, the life insurance benefit is paid to the trust. Then, the trustee manages the funds, including paying taxes and expenses and distributes the funds to the trust beneficiaries.
Irrevocable life insurance trust
Some people choose an irrevocable life insurance trust, meaning that the grantor funds the trust and then steps aside. The grantor cannot make changes to the trust or dissolve it.
There may be tax benefits to this type of trust. For example, if the life insurance proceeds are held in trust and the grantor’s spouse is the beneficiary, the spouse can receive installment payments instead of one payment all at once. That may help when the spouse passes away because it may reduce the amount of money that is in their estate that would be taxed.
The grantor may also be able to limit gift taxes by providing a letter to their beneficiaries advising that they can ask for their share of the money within a specific time period. If the beneficiaries can immediately access the money, the gift tax may not apply.
Estate planning and any related tax implications will be specific to the individual’s circumstances. An experienced attorney can help individuals determine which estate plan is the right fit for their needs.