A Brief Overview of Life Insurance Trusts

Just like tools in a toolbox, legal instruments related to estate planning can be simple and versatile – like Wills or Powers of Attorney – or complex and precise, allowing a person to achieve specific goals related to the unique circumstances of their estate. Life insurance trusts are one of the more advanced estate planning instruments. Read on to learn what they are and in what circumstances it may be useful for you to consider establishing one.

Life Insurance Trusts in a Nutshell

Trusts are financial instruments that allow a person to organize their assets and property in a certain way in order to:

  • reduce the size of their estate
  • obtain tax benefits
  • ensure quick and effective distribution of inheritance upon death

Trusts are able to achieve these goals by effectively changing the ownership of an apportioned part of the estate. Every trust has a grantor (the person who establishes the trust), a trustee (the person designated to distribute the trust when the grantor dies), beneficiaries (the person or people to whom trusts proceeds will be administered).

Life insurance trusts are trusts that hold life insurance policies. The grantor of a life insurance trust is the policyholder. By creating a trust, the policyholder transfers the ownership rights to the policy from him- or herself to the trust itself. After the grantor’s death, the trustee will distribute the death profits among the trust’s beneficiaries according to the instructions found in the trust document.

Why Are Life Insurance Trusts Useful?

Life insurance trusts help ensure that the proceeds from life insurance policies won’t be subject to estate taxes upon a person’s death. Since the grantor of the trust is effectively no longer the owner of the policy, the death proceeds will not be added to the final value of their estate and thus will be exempt from the estate tax. Additionally, a life insurance trust may also be useful for owners of large estates that, due to their size, will not qualify for estate tax exemption. In such cases, the proceeds from a life insurance trusts may be used by the administrator of the estate to pay pending estate taxes instead of liquidating a portion of the estate. However, it is important to remember that in order to secure such benefits, a life insurance trust must be created as an irrevocable trust. This means that it may not be revoked, altered, or amended once established.

Even more, a life insurance trust may also ensure supervision over the proceeds from the insurance policy if the beneficiaries of the trusts are minors or adults who may have problems managing their finances. Since the proceeds are administered by a trustee rather than by the beneficiaries themselves, this can protect the funds from being squandered or used against the grantor’s wishes.

While life insurance trusts are important estate planning tools, they do not come without certain drawbacks which may make them unsuitable for certain individuals or estates. If you’d like to know whether or not a life insurance trusts would be a really advantageous addition to your estate plan, schedule a free consultation with one of our lawyers. Luis E. Barreto & Associates, P.A. is an estate planning and probate administration law firm based in Miami Florida. We have a proven record of helping our clients achieve their goals and improve their estate planning situation.

Written by Luis E. Barreto

Luis E. Barreto

Luis is a probate and guardianship litigator with over 23 years of experience in the field. Determination of heirs, will contests, breaches of fiduciary duty, removal of personal representatives, guardians and trustees are just some of the types of litigation he addresses. In addition, he administers non-contested estates and guardianships.