Many people carry Life Insurance policies as part of their estate plan. Some carry a term life policy to fill a gap for their family or loved ones should they pass away at a younger age. Many parents purchase term life policies to provide for their children and/or spouse or significant other should they die at a younger age. Childless singles also purchase term life insurance policies to cover any debts they may have so they don’t leave a mess behind for their family or loved ones. Such as a policy large enough to cover the remaining balance of their mortgage.
But other people carry whole life insurance policies— meaning there will be a payout no matter how long the policy holder lives. These policies are often customized to meet very specific needs for the policy holder and their family.
Life Insurance can be a critical piece of the estate planning process. And determining how you want the life insurance benefits to be disbursed is also very important.
Beneficiary Designation
It’s likely that when you purchased your life insurance policy you designated a beneficiary to receive these benefits upon your death. Most people select a spouse or their children. Others select a sibling or close friend. Make sure your beneficiary designations actually reflect your wishes because beneficiary designations circumvent probate. Meaning your Will or Trust cannot override the beneficiary designation you have elected.
Life Insurance Trusts
An Irrevocable Life Insurance Trust, also commonly referred to as an ILIT, is an irrevocable Trust designed to protect and shelter life insurance benefits. This Trust must be created during the lifetime of the policy holder and can control a term life insurance policy, but more often a whole life insurance policy. This type of Trust can control more than one life insurance policy. A major perk of this type of Trust is that it can shield these policy benefits from estate taxes or gift taxes.
Many people choose to create these types of Trusts to secure a substantial financial legacy for their loved ones. This type of trust can be set up for any beneficiaries— current or it can be generation skipping.
To learn more about ILITs, what they are, and how they work, click here.
How Do I Put Life Insurance Into A Trust?
You have options! But all of the options require creating a Trust. Let’s take a closer look at Trusts and the various options available to you.
Types of Trusts
Trusts are amazing legal contracts that, when properly executed and implemented, can be used to manage and protect wealth within your estate.
There are two main types of Trusts: revocable and irrevocable.
Revocable Trusts can be individual or joint. And Revocable Trusts can also be changed, amended, or revoked during the lifetime of the trustmaker or trustmakers. Revocable Trusts also allow for the trustmaker to be the trustee during their lifetime, if they so desire.
Irrevocable Trusts can also be individual or joint Trusts. However, they typically cannot be changed, amended, or revoked after they are created. Additionally, in most cases the trustmaker cannot be the trustee. As you can imagine, Irrevocable Trusts needs to be done right from the onset because there is very little wiggle room after the Trust agreement is signed.
So, now that we have a good understanding of the major types of Trusts we can talk about getting life insurance into them.
The first and simplest option is to simply name the trustee of your Trust (acting as the trustee of your Trust) as the beneficiary designated on your life insurance policy. Within your Trust you should have specific instructions for how assets are distributed to your beneficiaries. Your life insurance company may require that you provide them with a Certificate of Trust to confirm the Trust is in existence.
In some instances you may want to name a beneficiary outright to receive the funds from the life insurance policy. But if your beneficiary is a minor, it is very important to make sure the Trust is named as the beneficiary so that your estate doesn’t have to go to court, get a conservator for the minor, and go through the probate process. This is what you’re trying to avoid with a Trust. So, if you’re naming someone other than the acting trustee of your Trust as the beneficiary, make sure they are living adults you truly want to receive these funds.
The second option is to create an Irrevocable Life Insurance Trust (ILIT). The trick here is that all life insurance premiums have to be paid from the funds within the Trust, so that means the Trust must also own the life insurance policy. Transfers are possible, but it is much cleaner if the Trust itself buys the life insurance policy. This can be a much more complicated process, but there are significant tax advantages to using an ILIT– particularly when it comes to larger estates.
If you have or would like to have a life insurance policy in a Trust, we would love to speak with you and help you determine which estate planning tools are best for you, your estate, and your legacy. Call us at (404) 736-6066 or visit our website to schedule a consultation.
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