Estate planning is a strategic undertaking. Sound planning involves more than creating a will and designating beneficiaries. It is about choosing tools that work together to provide the most advantages.
Trusts can enhance your plan in several ways and there are many trusts to choose from. One that many people misunderstand is the life insurance trust.
What is a life insurance trust?
A life insurance trust holds and manages life insurance policies for designated beneficiaries. To create this trust, you must transfer ownership of your life insurance policies from yourself to the trust.
There are two main types of life insurance trusts. A revocable life insurance trust allows you to retain control over the policy and make changes as needed. However, it may not provide significant tax benefits.
By contrast, an irrevocable life insurance trust (ILIT) relinquishes control to the trustee, making it more effective for asset protection purposes. The ILIT is often favored for its ability to remove the policy from the grantor’s taxable estate, reducing its size for tax purposes.
Specific advantages to consider
Life insurance trusts can offer multiple benefits, depending on your needs and goals. These include the following:
- Asset distribution control: You can specify how and when beneficiaries receive the proceeds.
- Vulnerable beneficiary protection: It can facilitate appropriate proceeds management for minors or beneficiaries with special needs.
- Privacy: It keeps the details of the policy and its distribution private, as trusts are not typically subject to public probate proceedings.
Additionally, life insurance trust proceeds go directly to the beneficiaries and are not required to pass through the costly and lengthy probate process. To learn more about these beneficial estate planning tools, seek guidance from a knowledgeable legal source.