Whenever you officially decide to get a life insurance trust, typically, you will be setting up an irrevocable life insurance trust too.
For what it’s worth, a life insurance trust is not entirely the same as the traditional life insurance policy people go for. Especially if estate planning is involved.
With this type, certain rules and regulations bind the insured, the assets, and the policies. Also, the life insurance will be placed in a trust and will be kept and managed by an appointed trustee.
Furthermore, in the event of your passing, this trustee will be in charge of how your insurance will be used or distributed.
So, if this sounds like a catch for you, rest assured you will get all you need to know from here.
What is Life Insurance Trust or an Irrevocable Life Insurance Trust (ILIT)?
A life insurance trust is a life insurance policy placed in an irrevocable trust. Generally, a life insurance trust is a legal structure that insures the assets of individuals or families.
More so, it allows you to distribute your life insurance proceeds to beneficiaries in the event of your passing. This means that it can help reduce your estate taxes and provide financial security for your loved ones. Equally, it’s an ideal way to create a legacy for yourself and your family.
An insurance trust can be used to transfer assets to beneficiaries while preserving the income and estate tax exemptions of the trust’s beneficiaries.
Why Should you set up an Insurance Trust?
Basically, people do a lot of things for a whole lot of reasons. However, these reasons must be favorable to them or to someone they love. When it comes to why people opt for insurance trusts, the driving force is not far removed from protecting themselves and their loved ones.
Meanwhile, these reasons are unique for each individual which includes
- Estate planning
- Protecting family assets from probate
- Creating a disbursement plan for heirs
- Paying off liabilities
- Benefiting non-trust nominees
So, it is worthy of note that once you enter your policy into a trust, it remains irrevocable.
How does an Irrevocable Life Insurance Trust work?
First, you might already have an ongoing life insurance policy but decides to entrust it. Then again, you may equally entrust a brand new policy. Whichever way, your life insurance policy will take a new route.
Basically, you have to set up a trust for your life insurance policy. This includes getting a trustee that will manage your policy. The policy leaves the control of the insured and falls on the trustee. Typically, this means that once you have your insurance in trust, you hand over all the control of the insurance to the capable hands of a selected trustee.
So, it becomes the responsibility of the trustee to manage your assets while you are alive and oversee the distribution of your inheritance according to your wish as the insured, when you pass away. The trust shields your assets from tax issues and probate and remains unbroken and will not be modified after it has been set up.
Revocable Trust
This is the opposite of this type of trust. It stays very flexible against the rigidness of the irrevocable type. With this type of trust, the insured can easily make changes as regards who will be a beneficiary or not. Assets allocation or distribution changes according to the desire and when desired by the insured.
However, there is a downside to this trust. The revocable trust attracts estate taxes. Therefore, if you wish to use this type of trust, talk with your insurance provider on the way forward with tax payments.
Who is fit for ILIT
This type of trust is best suitable for wealthy people who own estates and lots of assets. The trust really becomes a shelter that shields you from the whole tax payments on your estate that a revocable trust won’t shield you from.
Therefore, if you do not own large estates that can incur taxes or really large assets, you may speak with an insurance provider before deciding to set up an irrevocable trust.
How to set up a Life Insurance Trust
To continue, setting up a trust for your insurance can be a bit on the high side when you compare it with the traditional will.
For example, if you decide to set up trust online, it begins from at least $400. This, however, depends on the things you want in the trust and how you want it to run. Trusts get more expensive depending on different factors and individuals.
Furthermore, before you finally set up your trust, all the questions and decisions must be concluded. Changing of mind becomes impossible as the trust is irrevocable as soon as it starts running.
A trust of this kind requires you to include a trusted person as the trustee over the trust, a good insurance company that has life insurance policies that suits your insurance needs. This is very important.
Benefits of Life Insurance Trusts
As much as setting up a trust for your insurance can be very expensive, it equally comes with some benefits that will cushion the whole process for you. So, for what it’s worth, here are some benefits you can gain from this type of trust.
It protects you from Probate
It shelters you from probate. Now, probate is a public record and it involves the hassles that come with determining the validity of a will. If you do not wish your loved ones to go through the long and tiring process of will settlement and debt settlement, trust becomes the necessary step to take.
It protects your estates from tax
With a high net worth, your estates can be taxed heavily when you pass away. However, a trust gets that settled and your estate free from the high tax issues.
Your assets are protected
In the hands and watchful eyes of your trustee, your assets will be well protected. Not only that, your beneficiaries get what you want them to get without anyone contending the decision.
Your wish is carried out
True, you might not be around again to make sure everything goes as you planned. However, the trust carries out your wish even though you have handed over authority or control.
Disadvantages of ILIT
There are a few downsides to this trust that you should consider too.
It is expensive
The downside of this trust is that it can be expensive. So, before you think about setting up one, make sure it is totally necessary and it is what you need.
It is rigid
Once this trust is up and running, there is no going back to change a thing or two. You have to make a thorough decision at once and it stays that way.
You forfeit control
Your trust requires you to hand over the management and distribution of your assets to a trustee. It stops being in your power once the trust is up and running.
So, for you to enjoy this, make sure you speak with a professional and get proper guidance on how to set up an irrevocable life insurance trust.
