Estate Planning: Should You Create An Irrevocable Life Insurance Trust?
First, it must be insurable. The main goal of creating a Irrevocable life insurance trust is the possession of one or more life insurance policies. The Irrevocable Trust works the same as any other trust in the sense that a contract is between a grantor and a trustee to manage the property, or in this case, an insurance contract for the benefit of the named beneficiaries.
Why would you want to create an irrevocable life insurance trust?
When it comes to estate taxes, a life insurance policy is included as part of the gross estate. Therefore, a considerable policy can cause a tax burden on the insured’s assets, decreasing the participation of the beneficiaries. Two important writing considerations in estate planning would require is: 1) the grantor (insured) is not a trustee; and, 2) the trust must be irrevocable.
As a result, one of the most common reasons for creating an Irrevocable Life Insurance Trust is estate tax evasion. A properly structured Irrevocable Trust is established with death benefits paid to the Trust, thus excluding income that is included in the gross equity of the insured. In addition, a estate planning attorney You can structure the Irrevocable Trust for the surviving spouse of the insured allowing the exclusion of income from the gross estate as well.
Another common reason for creating this type of Irrevocable Trust is because asset protection against creditors. In this scenario, you would finance the Irrevocable Trust with cash transfers and use the cash to purchase the insurance policies. The insurance policies would name the Irrevocable Trust as the beneficiary. Since you would no longer have control or ownership of the insurance policy, the creditors would not have any claims against the Trust. For more information on this topic, read Part 2 of my asset protection series.
What are the disadvantages of this type of trust?
Please note that an irrevocable trust means that there can be no modifications, rescissions, or amendments once the trust is created. After the grantor finances or conferred the property to the trust, the grantor cannot modify or amend the terms of the trust or claim ownership of the conferred property. As a result, a grantor must fully understand their decision before creating an Irrevocable Life Insurance Trust.
There are gift tax consequences when insurance policies are funded or transferred to an irrevocable life insurance trust, resulting in a taxable gift. The complexity of gift taxes is beyond the scope of this particular article and will be discussed in a future article. The annual exclusion can be used to reduce or eliminate gift tax.
Finally, there may be a three (3) year consolidation period to achieve the tax benefit.
As a result, setting up any type of trust for your estate plan is complex and must be handled by an attorney to ensure that the insured gets the maximum benefit from an Irrevocable Life Insurance Trust.
THE FULL DISCLOSURE
This article only reflects my personal views and is not a substitute for legal advice. The information in the article is an opinion only and is provided for educational purposes only. The information may not be up to date depending on the reading date of the article.