There are many reasons to purchase a permanent life insurance policy. One of the most popular is the joy in leaving a large cash death benefit for your spouse and/or future generations. Once all of the paperwork is completed and initial premium is paid, policy owners are comfortable that they are looking out for the financial interests of their family. However, often ignored is the fate of that cash payout. If the death benefit is paid outright to beneficiaries, it is subject to the beneficiary’s creditors, ex-spouses, or the beneficiary’s own irresponsible whims. On the other hand, if that policy is either transferred to or purchased within an irrevocable life insurance trust (ILIT), the death benefit funds can be controlled by a trustee and doled out based on age thresholds, need, or after meeting specific life landmarks.
More About Life Insurance Trusts
Additionally, having the ILIT own the policy prevents the IRS from considering the death benefit as part of your estate upon your death, avoiding its inclusion in calculating your estate tax. If the life insurance is being purchased with the intention of using the death benefit to pay estate taxes, it should always be owned by an ILIT or some other trust outside of the estate to avoid estate taxation on the very funds being used to pay the estate tax.
Why Do You Need A Life Insurance Trust?
Like any responsible parent, spouse or other family member, you likely have a life insurance policy to help support your loved ones in the event of your death. Or you may have purchased a life insurance policy as an investment to build your estate. But what you may not know is that, when you pass on, your beneficiaries may be responsible to pay estate taxes. A life insurance trust can help you to reduce or eliminate these taxes.
How Life Insurance Trusts Work
When you die, your estate becomes taxable in the eyes of the government. As a default, your life insurance policy will pay out to your taxable estate, thus increasing the amount of the estate and possibly requiring taxes to be paid on it. By creating an irrevocable life insurance trust, a trustee essentially becomes the owner of your life insurance policy. Although this requires you to release control over the policy, you can decide who does have control, how your premiums are paid and who your beneficiaries are. You can even determine how payments should be made to those beneficiaries. Upon your death, the life insurance policy will not be released to estate, thus reducing or even eliminating the estate taxes required.
What You Should Know About Your Life Insurance Trust
There are a few requirements of creating a life insurance trust, all of which your life insurance trust attorney can help you meet or execute. To reduce or eliminate estate taxes, you’ll need to create an irrevocable trust, meaning that it cannot be modified or terminated without the permission of the beneficiary. Additionally, you must appoint a trustee to oversee the trust; you cannot serve as trustee of your own trust. Lastly, your life insurance trust must be created at least three years prior to your death.
Life Insurance Trust Attorney Las Vegas NV
As an expert Life Insurance Trust Attorney in Las Vegas, Nevada, Michael R. Cahill can help guide you through the process of setting up a life insurance trust. For more information, give the Law Office of Michael R. Cahill a call today.