Why Should Someone Use a Life Insurance Trust?

As couples start to approach the age of retirement, estate planning becomes a significant factor. Most people would like to pass on their assets to their children, grandchildren, or other people that they care about when they pass. Some people may even assume this happens. Unfortunately, this often is not the case. In reality, many people could lose a significant amount of their money to the estate tax without proper estate planning. One of the biggest assets that could be subject to this tax is someone’s life insurance benefit.

The Life Insurance Benefit

Many people take out a life insurance policy as a way to ensure that their loved ones have a source of income if they were to pass away prematurely. As people get older, their life insurance premium (and the benefit) could change. As people get closer to retirement age, their life insurance benefit starts to become an issue of the estate tax and less about protecting income (because they may have already retired). Even though the benefit is paid upon someone’s death, life insurance could still be considered part of someone’s estate. This is where an insurance trust comes into play.

How Do I Set Up an Insurance Trust?

The insurance trust has a few different components. The first person is called the grantor. This is the person who is creating the trust itself, typically the estate owner. The grantor then has to name a trustee. This is the person who is going to manage the trust itself. Finally, make sure to name a few beneficiaries. These people will receive the assets of the trust once the owner of the estate passes away.

How Does an Insurance Trust Work?

When someone sets up an insurance trust, the trust owns the insurance policy instead of the creator of the trust. Since the person no longer owns the insurance benefits, the benefit is excluded from the estate. Therefore, the total value of the estate is reduced, as are the insurance benefits. The amount that the taxes are reduced by will change with the value of the estate. Furthermore, some people may not even need the help of a life insurance trust to reduce the estate taxes that they owe. People should seek the help of an experienced estate planning attorney to ensure that their estate taxes are minimized as much as possible.

** Note: This article is not meant to be taken as any form of legal advice. This is purely informational. For questions please contact your attorney, or schedule an appointment with Vilar Law directly.
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