The Role of Life Insurance Trusts in Estate Planning: Maximizing Your Benefits

You probably already know that estate planning is one of the best ways you can provide for your loved ones in the future, protect your assets, and assure your legacy continues. What you might not know is that a life insurance trust can be an effective tool to provide liquidity, reduce estate taxes, and preserve wealth and assets for future generations. Learning more about the role that life insurance trusts can play in your estate planning can help maximize your benefits for your loved ones.

What is a Life Insurance Trusts?

When you buy a life insurance policy, it is a contract to provide benefits to your loved ones at the time of your death. A life insurance trust is a legal entity created to own and manage that life insurance policy on your behalf. When you create a life insurance trust and fund it, the trust becomes the official owner of the policy, rather than you, the insured individual.

Key Benefits of a Life Insurance Trust

There are several benefits to choosing a life insurance trust, including:

Estate Tax Reduction

If you have a life insurance policy in your own name, death benefits would usually be included in your estate, which could increase the estate tax liability for your beneficiaries. By setting up a life insurance trust, however, you effectively exempt the proceeds from the life insurance from your taxable estate. Beneficiaries can then receive the full payout from your life insurance tax-free. 

Liquidity for Estate Expenses

In many cases, your loved ones will be faced with funeral expenses, outstanding debts, and estate taxes, which they will need to pay quickly. With a life insurance trust, benefits can provide immediate cash to help cover these expenses. Having access to these funds could protect your family from having to sell off family assets like your home or business to raise the needed money.

Control Over How Proceeds are Distributed

Some individuals choose a life insurance trust because it allows them to set specific terms for how and when the proceeds get distributed to beneficiaries. For instance, you might choose to delay access to the funds until your beneficiaries reach a certain age or set up regular disbursement periods. This capability might be especially important if you have minor children or a child or other beneficiary with special needs and want to make sure they have ongoing financial support instead of one, lump-sum payout. 

Protection from Creditors and Lawsuits

As mentioned earlier, assets held in a life insurance trust are protected from estate taxes, but they are also generally protected from creditors that might pursue your beneficiaries. Especially if they are involved in divorce proceedings, lawsuits, or have personal business liabilities.

Talk to an Estate Planning Expert about a Life Insurance Trust

It’s important to talk with an estate planning attorney about how to set up a life insurance trust and how it fits in with the rest of your estate planning. The estate planning group at Lonich Patton Ehrlich Policastri (LPEP Law) have a wealth of expertise in the full range of estate planning legal services, including setting up trusts. Schedule your free, no-obligation consultation to speak with us at LPEP Law about how you want to protect and provide for your family in the future.

 

Disclaimer: this article does not constitute a guarantee, warranty, or prediction regarding the outcome of your legal matter.