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What role does a life insurance trust have in your estate plan?

On Behalf of | May 19, 2023 | Estate Planning

A life insurance trust is a powerful tool in estate planning that can ensure your loved ones are financially secure after your passing. Some individuals know they need to have life insurance, but they don’t realize how a life insurance trust can benefit them.

A life insurance trust, particularly an irrevocable life insurance trust (ILIT), is a legal entity created to own your life insurance policy. When you pass away, the insurance payout goes directly into the trust and bypasses your probate estate, so it’s not subject to probate administration. This can expedite the availability of funds for your beneficiaries and protect these funds from your estate’s creditors.

Advantages of a life insurance trust

One of the significant advantages of an ILIT is its potential to eliminate or reduce estate taxes. Although California does not impose a state estate tax, federal estate tax may apply if your total estate, including life insurance proceeds, exceeds the exemption amount. By placing the life insurance policy into an ILIT, you remove it from your taxable estate, possibly saving your beneficiaries thousands of dollars.

ILITs also provide control over the disbursement of assets. As the trust’s creator, you can dictate terms about when and how beneficiaries receive distributions, allowing you to protect minor beneficiaries or those who may not be financially responsible.

Drawbacks of a life insurance trust

It’s important to remember that ILITs, being irrevocable, require careful consideration. Once established, the trust’s terms can’t generally be changed, and the life insurance policy within it cannot be accessed or borrowed against. There’s also a potential for gift taxes to apply when you fund the ILIT.

An ILIT can be a significant component of your estate plan, providing financial security and peace of mind for your loved ones in California. Remember, this is only one component of a comprehensive estate plan.