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Part of your estate planning needs to focus on what happens to your life insurance. One possibility is that your life insurance is paid into a trust. For some people, setting up a trust can be beneficial. If you are considering establishing a trust for your life insurance payment, here is what you need to know.
What Is an Irrevocable Life Insurance Trust?
When you have life insurance, you have the option of naming beneficiaries to receive the payout amount when you die. However, your beneficiaries could face taxes and other fees that could reduce the amount that they receive. To minimize or eliminate the amount of taxes that would come out of the insurance payment, you can set up an irrevocable life insurance trust.
An irrevocable life insurance trust would accept the insurance payment when you die and then pay out to the beneficiaries. By doing this, your insurance payment is no longer considered part of your estate. As a result, it is no longer subject to estate taxes.
The trust is irrevocable, which means that the terms of the trust cannot be changed by anyone, including the trustee. In order to establish the trust, there are other rules that must be followed.
What Are the Rules to the Trust?
In addition to the trust being irrevocable, it also has to be at least three years old at the time of your death. If you fail to create the trust prior to the three-year period, the Internal Revenue Service would view it as part of your estate and it would face the same taxes as the remaining assets. This could have a significant impact on the amount of the insurance payment that is left for your beneficiaries.
Another condition of the trust is that how it should be paid out has to be clear. For instance, if you want your beneficiaries to receive payment 10 years from the date the insurance payment is received, include it in the trust's details. Remember, the trust cannot be changed later, so if that is your condition, your beneficiaries cannot receive any of the payout until that 10-year period is reached.
There are many other considerations to make when creating an irrevocable life insurance trust. To better understand the rules and to ensure that your trust is set up properly so that your beneficiaries are cared for, consult with an estate lawyer's office, such as Housecall Wills & Estates, as soon as possible.
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