So while your estate may not be big enough to trigger federal estate taxes, if you live in one of the states with state estate or inheritance taxes, your estate may still owe taxes to the state. Once you create a life insurance trust, you are no longer the legal owner of the insurance policy—instead, the trust is. If there is at least one person in your life that financially depends on you (spouse, children, etc. (But watch out for gift taxes!) Upon the death of the insured, the trustee invests the insurance proceeds and administers the trust for one or more beneficiaries. Get an experienced lawyer to help you work through the issues and to draw up the document. Also, to keep your policy out of your estate, when you give it to another person you must give up all control over the policy. For example, after the first $50,000 of estate value the probate fees are 1.5% in Ontario and 1.4% in British Columbia. This means once the policy is in trust this decision can't be changed later on, so it's important to … Contact Zander Insurance to get a term life insurance quote now. (This assumes that the aggregate value of the estate plus the life insurance is large enough to be subject to estate taxes. However, since such payment is on behalf of the trust-owned insurance policy, it is deemed a gift to the trust. A trust is simply a legal arrangement that holds an asset, such as a Life Insurance policy, separately from the rest of your assets for the benefit of at least one other person. You can transfer ownership of an existing policy to the ILIT after it's been formed, or the trust can purchase the policy directly. Customarily, the trustee of the insurance trust is authorized, but not required, to either purchase assets from the insured's estate or lend insurance proceeds to his or her estate. This could be shares, a home, cash, or a life insurance policy. In the United States, proper ownership of life insurance is important if the insurance proceeds are to escape federal estate taxation. The trust must exist for at least three years before your death. It separates it from your estate, allowing you to generate a large sum still to be paid out to your heirs without contributing to your estate’s final value. A more simple method of keeping the money from a life insurance policy out of your taxable estate is to just give the policy to someone else. If the proceeds are used to pay the insured's estate taxes, it would at first appear that the proceeds could not be on hand to be taxed at the beneficiary's subsequent death. The insurance proceeds go into the trust when someone passes away. In some states, the information on this website may be considered a lawyer referral service. You don’t own the policies, the trust does. And yet according to insurer Aegon, only 6% of life-insurance … If you are the trustee, you have control of the trust, which could lead to the trust being included in your estate. Your use of this website constitutes acceptance of the Terms of Use, Supplemental Terms, Privacy Policy and Cookie Policy. [2] If the policy is owned by the insured, the proceeds will be subject to estate tax. Some states also levy estate and inheritance taxes. Avoid inheritance tax and probate One of the biggest benefits of writing your life insurance policy in trust is that you can actually sidestep paying inheritance tax as the value of the policy will not count towards the value of your legal estate. Do Not Sell My Personal Information, Every Californian's Guide to Estate Planning. My life insurance policies are in trust for my wife and three kids and my wife is also a trustee, along with me. A life insurance trust is a trust that owns the eventual proceeds of your life insurance policy. An irrevocable life insurance trust (ILIT) only holds life insurance policies. Your life insurance policy is a significant asset, and by putting life insurance in trust you can manage the way your beneficiaries receive their inheritance. The premiums on the policy are paid with gifts to the life insurance trust from the insured and, if the trust is properly drafted, such gifts will qualify for the $11,000 per donee annual exclusion from gift tax liability. How a life insurance trust works. An ILIT is a type of living trust that's specifically set up to own a life insurance policy. Life insurance put into a trust is defined as a legal arrangement in which you give power to a trustee to ensure the assets paid out from your life insurance policy are used exactly as you wish. Although two of my kids are in their 20s, they would benefit from professional help, as would my wife, should I die whilst the policies are in force. By placing ownership of the policy with a trust — not the insured — it removes the death benefit from your estate. How do I write my policy in trust? The insurance trust owns your life insurance policy. Here's how they work and how to set one up. It's a good idea to speak to an experienced trust attorney who … A funded life insurance trust owns both one or more insurance contracts and income producing assets. Learn how and when to remove this template message, "Internal Revenue Code Section 2042(1)&(2)", "Internal Revenue Code Section 2010(c)(3)(a)", https://en.wikipedia.org/w/index.php?title=Life_insurance_trust&oldid=998139115, Articles needing additional references from November 2007, All articles needing additional references, Creative Commons Attribution-ShareAlike License, Doing so may be inconsistent with the insured's wishes or the best interests of the. When you die, the death benefit is paid to the ILIT and its proceeds distributed to the beneficiaries named in the trust. Learn more about Reducing Estate Tax by Making Gifts. If properly drafted, probate may be avoided as the insurance proceeds will pass outside of the estate. Here’s what you’ll need to think about when setting up the paperwork: 1. And the exemption rates on those taxes can be lower than the federal exemption. A life insurance trust is an irrevocable, non-amendable trust which is both the owner and beneficiary of one or more life insurance policies. So you must carefully consider whether you trust that person with the policy. In most cases, people turn to life insurance trusts in order to avoid or reduce estate taxes. Learn more about Transferring Your Life Insurance. Leaving life insurance for your child’s use after your death is always a good idea. 'Irrevocable ' act a dependent and to draw up the document if are. Long as you plan ahead for it to help you work through the issues to! 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