A life insurance trust can buy life insurance policies for the person establishing the trust. A revocable trust set up with an estate planning attorney in Waco can reduce the payment of estate taxes. That life insurance trust owns the insurance policy and collects death proceeds when that person dies. Then, a trustee distributes the benefits to the beneficiaries according to the terms of the trust. A trustee is a person given powers of administration with a legal obligation to administer it only for the purposes specified. While a beneficiary is a person who derives advantage from something.
When the person making the trust, called the grantor, names the trust as the beneficiary, it gives the grantor more authority to:
- Provide immediate cash to pay expenses
- Reduce estate taxes by excluding life insurance proceeds from your estate
- Proceeds avoid probate and are free from income and estate taxes.
- Can provide income to a spouse without insurance proceeds being included in spouse’s estate.
- Control the use of proceeds
How does an insurance trust reduce estate taxes?
The insurance trust owns your insurance policies for the grantor. Since you don’t personally own the insurance, it will not be included in your estate.
Why not just name someone else as the owner of my insurance policy?
If someone else, like your spouse or adult child, owns a policy on your life and dies first, the cash value will be in his taxable estate.
Who can be beneficiaries of the life insurance trust?
The grantor can name any person or organization. Most people name their spouse, children, and grandchildren.
Are there other benefits to naming the trust as the beneficiary of an insurance policy?
Yes. If you name an individual as beneficiary of a policy and that person is incapacitated when you die, the court will probably take control of the money.
When should I set up an insurance trust?
You can set up one at any time, but because the trust is irrevocable many people wait until they are in their 50s or 60s. By then, family relationships have usually settled.
How does an insurance trust give me control?
With an insurance trust, your trust owns the policy. The trustee you select must follow the instructions you put in your trust. And with your insurance trust as the beneficiary of the policies, you will even have more control over the proceeds.
How do I know if a life insurance trust is right for me?
A life insurance trust is not needed for every estate planning situation. It’s best to talk with a lawyer who is experienced in life insurance trusts to determine whether it is right. At Dunnam & Dunnam, we have a board-certified estate planning and probate attorney who can guide you through the best solutions for your situation. Call us at 254-753-64376 to discuss your estate plan.
Vance Dunnam, Jr.
Vance has been licensed by the State Bar of Texas since 1977 and has practiced law in Waco, Texas since 1978.
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