Many people choose to take out life insurance policies so that their loved ones can obtain some added funds in the event of death. The payouts from these policies can often prove immensely beneficial to surviving loved ones. As a result, you may have taken out such a policy for yourself in hopes of continuing to provide support to your family after your death.
What you may need to remember, however, is that the proceeds from this life insurance policy could potentially face taxation through estate taxes. Because estate taxes can prove complicated, you may wonder whether you could protect your family from having to deal with taxes in relation to life insurance proceeds. If so, you may want to consider your trust options.
Irrevocable life insurance trust
Because many forms of trusts exist and each has its own benefits, you may want to ensure that you explore your options closely to determine which could work for your circumstances. When your concerns revolve around life insurance, an irrevocable life insurance trust could suit your situation. When you place your policy in an ILIT, the trust becomes owner of the policy, which means it will no longer be considered part of your estate. This could have estate tax implications for some, as the total value of the assets that are considered part of a person’s estate effects whether the estate would be subject to such taxes.
This ownership transfer could help protect the policy proceeds from potentially being subject to estate taxes, but only if you do not die within three years of transferring the policy to the trust. However, if you do not already have a policy in place, you could use the ILIT to purchase the policy, which would allow you to avoid the three-year contingency.
You will also need to name a trustee. Because the trust is irrevocable, you cannot revoke or change the trust once you have set it up. You also cannot act as the trustee. Fortunately, you can name anyone you see fit to act as trustee.
Because the ILIT will hold ownership of the insurance policy, it will also act as the direct beneficiary of the payout. From there, proceeds will be distributed in accordance with the terms of the trust, which you determine and create.
If you are interested in using an ILIT to protect your policy proceeds from taxation, you may want to gain more information from reliable resources.