Authored by Haley Price
Life insurance can play a critical role in protecting the financial well-being of loved ones in the event of an individual’s passing. One strategic approach to maximize the benefits of life insurance is to hold the policy in a trust. Whether or not you should put your life insurance in a trust depends on your specific financial situation, goals, and estate planning needs. The following are some potential benefits and considerations for holding life insurance in a trust:
- Estate Planning: Life insurance proceeds are typically included in the insured’s estate for estate tax purposes. If you have a large estate, establishing an irrevocable life insurance trust (ILIT) to hold a life insurance policy can remove the policy from your taxable estate and provide liquidity for the payment of estate taxes.
- Creditor Protection: Every state has a unique legal framework for determining the extent to which life insurance proceeds are protected from the creditors of the insured. Nevertheless, by transferring ownership to an irrevocable trust, any proceeds surpassing these thresholds can be shielded from the creditors of both the insured and the beneficiaries.
- Control and Protection: By holding life insurance in trust, you can control how the insurance proceeds are managed and distributed after your death. If there are minor beneficiaries or individuals who may not have the necessary financial management skills to handle such assets, a trust can act as a mechanism to manage and distribute the funds responsibly. The trust may specify the conditions and timing of disbursements, ensuring that the proceeds are used for the intended purposes, such as education or long-term financial support.
- Complex Family Situations: A trust can address sensitive issues and ensure fair distribution for complex family dynamics or blended families. By designating the trust as the owner or beneficiary of the life insurance policy, the insured can stipulate specific instructions on how the proceeds should be allocated among beneficiaries, potentially minimizing conflicts and disputes that may arise otherwise.
The decision whether to hold life insurance in trust should be based on your individual needs, goals, and circumstances. Placing life insurance in a trust can reduce estate tax liability, provide additional creditor protection, provide control over distribution, and address complex family dynamics. To determine the best approach for you, it is essential to work with an experienced estate planning attorney and/or financial advisor who can assess your circumstances and provide tailored guidance.