Using a trust to receive life insurance proceeds, whether a revocable life insurance trust or an irrevocable life insurance trust, has a number of advantages. One important consideration is that the proceeds of a large policy can be managed professionally by the trustee. Leaving large insurance death benefits to individual beneficiaries can have undesirable life consequences, especially if the policy is intended to benefit those who are young or inexperienced in managing large sums of money. Leaving large life insurance death benefits directly to a spouse might have the undesired result of increasing the estate tax due upon the death of the second spouse.
If one goal is to remove the life insurance proceeds from the estate of the insured (to minimize the size of the estate for estate taxes), having a trust own the policy may be more attractive than simply having another family member own the policy on the insured’s life. The trust can be structured to meet the goals of the insured, while the insured’s objectives might fail if the policy is gifted to another family member who then has control over the policy.
One consideration in using a life insurance trust is the cost of preparing the trust, and the potential of having to file annual trust tax returns if the trust has income during the life of the insured. Special provisions must be included to qualify gifts to the trust for the annual gift tax exclusion. You should consult your attorney and tax professional in applying these concepts to your individual situation. Call Karen Hindson for more information on life insurance trusts for your family.