UNDERSTANDING LIFE INSURANCE TRUSTS

When creating an estate plan, many people become concerned about federal and state taxes that could lower the amount that actually goes to beneficiaries. Trust administration experts say that some taxes can be circumvented by creating an irrevocable life insurance trust (ILIT). This type of trust can help Floridians by allowing more of their money to go to their heirs, instead of to the federal or state government.

The purpose of an ILIT is to limit the amount of taxes paid on an estate. To avoid these taxes, the life insurance policy is owned by a trust, and the trust is also the beneficiary. When the insured person dies, the insurance proceeds are paid to the trust, and the money is then distributed to beneficiaries. This allows the full amount of the policy to pass on to the beneficiary, without hobbling the recipient with unnecessary taxes.

The trust can also be created to pay estate taxes if the insured’s holdings are extensive. In that way, the trust money will be protected from any creditors that may be seeking money from the beneficiaries.

If you are planning to establish the trust for your immediate family members, including children or spouses, the process is generally straight-forward. However, if you intend to name other relatives, such as nieces and nephews, as trust beneficiaries, some additional work may be required. Nieces and nephews fall into a category that is heavily taxed, according to legal experts, so some maneuvering may be required to ensure they get the full benefits you intend.

There are other drawbacks to ILITs, as well; the trust cannot be amended or changed after it is created, and the former policy owner now loses control of the policy altogether. Setting up the trust may also be expensive initially, and the insured person can no longer use the policy for loans or other transactions.

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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.