Life Insurance Trust

Setting up a life insurance trust and getting a life insurance policy is a selfless action. The payout of the policy is awarded to a beneficiary or beneficiaries of the policy holder’s choosing. That means that an individual is paying money in the form of premiums so that when they die, another individual may receive financial support as a result of the insurance.

For this to take place, there must be someone in your life that you are wanting to protect and provide for in case something were to happen to you. If you are a young and new parent, you may not possess many financial assets other than a life insurance policy and thus it’s an extremely important asset to you. If you take public transportation to work, rent an apartment, and possess no investment accounts, then you may believe that estate planning is not for you. This page provides information on why you might need to re-think that as estate planning is not just for the 1 percenters, but rather is for everyone.

Purpose of Life insurance

Life insurance give the policy holder ease of mind as the insurance shifts the risk of financial loss arising from death from the beneficiary, who is sometimes even a dependent of the policyholder, on to the insurer.

Without life insurance, families can face financial catastrophe if the family income is lost due to the death of the primary earner.

Without life insurance or other liquidity, families may be forced to liquidate assets, sell necessities and much more in order to cover living expenses and costs of a funeral.

Types of Life Insurance

Man protecting things from falling down, representing a life insurance trust.

There are two basic forms of life insurance, whole life policies and term life policies, each with their own positives and negatives.

Whole life policies are life insurance policies that do not expire. These policies are funded throughout the life of the insured. Contributions to a whole life policy which exceed the costs of insurance accumulate over time which can create a cash surrender value of the policy which can be borrowed against, withdrawn from, or even used as a credit to cover the insurance premium. The drawbacks are that whole life policies typically costs more during the first 12 to 15 years of the policy than a term policy (though typically save money during the course of the insured’s lifetime) and typically require physical examination by a medical professional.

Term life policies have no cash surrender value and only insure against the premature death of the insured during a limited policy period. To continue coverage, the policy must either be renewed or some companies offer a form of “hybrid” that allows a term life policy to be converted into a whole life policy. Term life policies are the simplest and easiest form of life insurance to buy and in many occasions can be purchased without a medical examination, even later in life.

Life Insurance in Relation to Estate Planning

Umbrella that says Naming a trust (that lists your spouse and/or child as the beneficiary) as the recipient for the payout of your insurance policy is an advantageous strategy to make the most of your family’s inheritance. If you are worried that a living trust may have pricey up front costs, then you can draft a document called a testamentary trust that provides the same comforts at a cheaper cost.

A testamentary trust is an instructed provision within your Last Will and Testament that directs your personal representative to draft the document on your behalf after you die. The trust will be created after the completion of the probate process and allows for the transfer of any of your assets into the trust. You can name the testamentary trust as the beneficiary of your insurance payout and have the trustee administer the funds for your minor children. For example, the appropriate language for naming the testamentary trust as the beneficiary will be similar to the following: Beneficiary is “The Trust Created By The Will of John Doe.” You can even provide detailed directions for how and when the funds are to be disbursed. Combining your life insurance policy with your estate plan will allow you to reap the rewards of both planning tools and provide ideal comforts to those you leave behind.

Estate Plans Tailored to Each Individual Client

A living trust, also called an inter vivos trust,  is a terrific tool that allows property to be transferred into it while maintaining use of the property. It also is unique in that unlike a will it can avoid the probate process and additional taxes.

It was mentioned, however, that a living trust is not for everyone. If you do not possess many assets other than a life insurance policy and you do not want to pay the upfront costs for establishing a trust, then a testamentary trust may be the better option for you. The testamentary trust will allow for you to avoid upfront costs, while still establishing a trust, and maintain ownership of your property throughout life. If any of those selling-points are priorities for you, then the living trust is not for you. Also, be careful who you name the beneficiary of your life insurance policy. It is highly recommended to name a trust as a beneficiary to avoid the policy from being included in the value of your estate and increasing taxes for it.

Naming your personal representative, children, or the estate itself as beneficiaries will increase the estate value resulting in higher taxes. It is possible to name a spouse as the beneficiary and avoid increasing estate value if they are not your personal representative, but what happens to the money from there is now in their hands and may not extend to encompass all that you had imagined for it. Further, naming your estate as a beneficiary will expose all proceeds of the life insurance policy to the insured’s creditors.

Because there are many “dos” and “ don’ts” when it comes to your life insurance policy it is always best to meet with an experienced estate planning attorney that can choose the path that is right for you.

Things to Keep in Mind:

One of the important points touched on was how to avoid raising the value of your estate. The reason for this is because there is a set limit to estate value that is exempt from federal taxation. If a $1million life insurance policy now counts towards the value of your estate, then you are that much closer to exceeding the maximum exemption. Once you are over the limit the value of your estate is taxed upwards of 35% (Sheesh!).

To avoid increasing the value it is recommended to name a trust as the beneficiary of the life policy. To obtain this financial advantage, the trust must be irrevocable (unable to be changed) and you cannot act as trustee. Also, ownership cannot transfer within three years of your death or else the IRS will discredit such a change and add it to your estate anyhow. For these reasons, it is best to get started now!

***Life Insurance Policy’s designated beneficiary is either the trust or trustee of the trust “created by the will of John Doe.” (Beneficiary = The Trust Created By The Will of John Doe).

Explore More

Download Your Free Estate Planning Guide

Learn how to protect your family, your assets, and your legacy.

    • Schedule a Consultation With Our Orlando Law Firm

Download Your

Free Estate Planning Guide

*We take your privacy very seriously.