Co-Founder, TermInsuranceBrokers.com, Goldenzweig Financial Group, Las Vegas, Nevada
Yes. There are two main life insurance trusts that people use - revocable and irrevocable life insurance trusts. People use life insurance trusts because there are tax advantages that it offers, helps protect the proceeds, and helps you distribute the assets to your children at the least possible cost.
An irrevocable life insurance trust (ILIT) is a legal document set up to distribute life insurance proceeds in a specific manner, depending on how the trust is designed. ILITs receive special tax consideration from the IRS that is not given to life insurance policies that would otherwise be owned by a natural person or revocable trust. Since the trust is irrevocable, the terms of the trust cannot be changed (think of it like putting the contents in a vault and throwing away the key - it can't be opened til the insured dies). An ILIT can offer many substantial advantages to protect life insurance proceeds. It can also help you distribute your property to your children at the least possible cost.
If you have a taxable estate, you have a choice - pay the tax with your own money or pay only a fraction of the tax and use someone else's money to pay the rest. If you want to use someone else’s money to pay the tax, you can buy a life insurance policy. The type of life insurance policy will depend on the specific circumstances, but is usually a survivorship universal life policy if used for estate tax purposes. The life insurance policy may be secured for pennies on each dollar of tax that you owe. By putting the life insurance policy in an irrevocable trust, the proceeds become available to pay taxes due upon death.
A life insurance policy that you purchase will require the same premium whether you put the policy in the trust or keep it outside of the trust. If you put the policy in the trust, the death benefit is not included in the calculation of the size of the estate. This is a huge tax savings, especially if the proceeds are several million dollars.
If you keep the policy outside of the trust, the proceeds will be included in calculating the size of the estate – potentially increasing the size of the estate by a big margin, and you may therefore have to pay much higher estate taxes before any of the property can be distributed to your children or other beneficiaries.
Please let me know if I can be of further assistance. Thanks very much.
Yes, a life insurance policy can be owned by a trust. Irrevocable Life Insurance Trusts (ILIT's) are designed to keep life insurance proceeds from being calculated in the value of a large estate, and thus avoid paying estate taxes. The ILIT must be set up at least 3 years before death for tax protection purposes. When an Irrevocable Life Insurance Trust is set up, the person whose estate is being protected cannot have any incidences of ownership in the policy.
President, The Firm of Steven H. Kobrin, LUTCF, 6-05 Saddle River Rd #103, Fair Lawn, NJ 07410
Sure can.
You’ve got some good information from the other folks posting on your question. In addition, get a hold of a good estate planning attorney, and he/she will tell you everything else you need to know.
Now let me tell you why I wish no one would ever have to use a trust!
I personally have a huge problem with the estate tax. I really think the government has no right to seize a significant part of a family’s wealth. It is not their job to cut rich people down to size and redistribute their wealth.
Such a practice is not only unfair to the people who have achieved fame and fortune. It also deprives others of the ambition and incentive to do the same.
The idea that there is a fixed amount of money to be made, and opportunities to be pursued, is blatantly wrong. The world could and should sustain millions and millions of people making it big.
It is up to human ingenuity and creativity to find ways to do it. Government regulation of wealth restrains his growth. It holds us back.
So yes: people with an estate tax exposure should definitely get a trust and preserve as much of their estate as possible for the next generation. Hopefully the day will come soon when nobody has this unnecessary liability.
And by the way: I am taking this position as a person who sells a lot of life insurance for estate preservation. I would gladly forgo those sales in favor of a justifiable tax policy. I could still make a lot of money selling life insurance to protect the widows and orphans; to help business owners get bank loans and fund buy-sell agreements; and to set up policies on their kids.
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An irrevocable life insurance trust (ILIT) is a legal document set up to distribute life insurance proceeds in a specific manner, depending on how the trust is designed. ILITs receive special tax consideration from the IRS that is not given to life insurance policies that would otherwise be owned by a natural person or revocable trust. Since the trust is irrevocable, the terms of the trust cannot be changed (think of it like putting the contents in a vault and throwing away the key - it can't be opened til the insured dies). An ILIT can offer many substantial advantages to protect life insurance proceeds. It can also help you distribute your property to your children at the least possible cost.
If you have a taxable estate, you have a choice - pay the tax with your own money or pay only a fraction of the tax and use someone else's money to pay the rest. If you want to use someone else’s money to pay the tax, you can buy a life insurance policy. The type of life insurance policy will depend on the specific circumstances, but is usually a survivorship universal life policy if used for estate tax purposes. The life insurance policy may be secured for pennies on each dollar of tax that you owe. By putting the life insurance policy in an irrevocable trust, the proceeds become available to pay taxes due upon death.
A life insurance policy that you purchase will require the same premium whether you put the policy in the trust or keep it outside of the trust. If you put the policy in the trust, the death benefit is not included in the calculation of the size of the estate. This is a huge tax savings, especially if the proceeds are several million dollars.
If you keep the policy outside of the trust, the proceeds will be included in calculating the size of the estate – potentially increasing the size of the estate by a big margin, and you may therefore have to pay much higher estate taxes before any of the property can be distributed to your children or other beneficiaries.
Please let me know if I can be of further assistance. Thanks very much.
You’ve got some good information from the other folks posting on your question. In addition, get a hold of a good estate planning attorney, and he/she will tell you everything else you need to know.
Now let me tell you why I wish no one would ever have to use a trust!
I personally have a huge problem with the estate tax. I really think the government has no right to seize a significant part of a family’s wealth. It is not their job to cut rich people down to size and redistribute their wealth.
Such a practice is not only unfair to the people who have achieved fame and fortune. It also deprives others of the ambition and incentive to do the same.
The idea that there is a fixed amount of money to be made, and opportunities to be pursued, is blatantly wrong. The world could and should sustain millions and millions of people making it big.
It is up to human ingenuity and creativity to find ways to do it. Government regulation of wealth restrains his growth. It holds us back.
So yes: people with an estate tax exposure should definitely get a trust and preserve as much of their estate as possible for the next generation. Hopefully the day will come soon when nobody has this unnecessary liability.
And by the way: I am taking this position as a person who sells a lot of life insurance for estate preservation. I would gladly forgo those sales in favor of a justifiable tax policy. I could still make a lot of money selling life insurance to protect the widows and orphans; to help business owners get bank loans and fund buy-sell agreements; and to set up policies on their kids.