Setting up a life insurance trust protects inherited property from land taxes and avoids probate processes. A will is a legal requirement to certify a deceased will, pay off outstanding debts, and pass inherited property to heirs.
A life insurance trust can be thought of as a safe for inherited assets. Policies are placed in trust and managed by the Trustee. Upon the death of the policyholder, the Trustee distributes the proceeds to the designated beneficiary.
Policyholders are prohibited from serving as Trustees. Most people appoint their spouse or adult children to manage their plantations. Some people prefer to use the services of a neutral third party such as an estate planning attorney or insurance trust company. The policyholder has control over the appointment of the beneficiary and the terms of distribution. The guardian cannot access the account until the policyholder dies.
Like most things in life, a life insurance trust offers advantages and disadvantages. Key advantages include avoiding probate processes and exemption from estate taxes. The main disadvantage is that once trusts are established, they become irrevocable and irreversible.
Sufficient consideration must be given to the appointment of a Trustee. It is best to discuss the position with the Trustee in question to determine if they agree with the administration’s duties of the plantation. Other considerations include who receives the insurance proceeds and how the funds should be distributed.
Insurance proceeds can be distributed in whole or in part. Distributions can be in the form of one-time payments or installments. Policyholders can choose to distribute payments monthly, quarterly, semi-annually or annually. A lump sum payment can be made to beneficiaries when certain milestones are reached such as graduating from college, starting a business, or getting married.
Policyholders who bequeath money to beneficiaries who receive government assistance can set a distribution schedule so as not to interfere with their ability to receive government assistance.
Irrevocable life insurance trusts allow policyholders to award gifts of up to $10,000 per year, per individual beneficiary tax-free. Gift giving of up to $20,000 is allowed for married couples. The prize money can be bequeathed to the beneficiary as much as the policy can accommodate.
Annual life insurance proceeds are considered a gift to the beneficiary by the Internal Revenue Service. No gift tax is payable when proceeds comply with the gift limit. Heirs should consult with a tax attorney to ensure they comply with the IRS decision.
One important aspect of a life insurance trust is the Crummey Letter. Named after Clifford Crummey; a man who rose to prominence for his court case involving an irrevocable life insurance trust.
The insurance company must send a Crummey Letter to the beneficiary when the policyholder deposits the annual premium. Beneficiaries have a certain time to withdraw the proceeds or the money is used to fund insurance premiums. The issuance of the Crummey Letter ensures the annual premium remains free of gift tax.
Although life insurance trusts are complex, they offer substantial flexibility during the incorporation phase. Every belief is as unique as the person who built it. A life insurance trust is a safe way to protect inherited assets and provide for loved ones for years to come.
