What Is An Irrevocable Life Insurance Trust?

By Simon Volkov

An irrevocable life insurance trust is a document that shields life insurance proceeds from inheritance tax. The policy is protected by a trust when ownership is transferred to an estate. Inheritance cash can be distributed to appointed beneficiaries instead of enduring the probate process.

To establish an irrevocable life insurance trust involves working with a certified estate planner. Irrevocable trusts cannot be changed once they are finalized, so policy holders need to carefully consider who will be named as the Trustee and beneficiaries. They only way to be released from insurance premiums is by surrendering the policy.

This type of life insurance trust is used by people that have a net worth of at least $2 million. There is no reason to setup irrevocable trusts when the estate value is less because the IRS provides allowable inheritance tax exemptions that offer similar benefits.

The wealthy utilize irrevocable trusts to accumulate funds that will cover the cost of estate taxes payable on inheritance gifts. Trusts can also be structured to provide heirs with inheritance money for years to come.

A Trustee needs to be appointed to mange life insurance trusts. This person has access to sensitive information and is privy to nearly everything pertaining to the Insured’s personal financial situation. When the trust is finalized the Trustee cannot be changed without court authorization, so it is crucial to make a wise selection.

Trustees can be removed from the policy if they fail to perform required duties. To discharge Trustees requires the Insured to record an official ‘Change of Trustee’ form through the court.

Trustees are charged with two primary duties which include paying insurance premiums and notifying beneficiaries of their right to withdraw funds. If Trustees neglect duties they can be sued for financial damages.

In many cases, policyholders select relatives to act as the Trustee, but this might not be the smartest choice. A good alternative can be to employ the services of a trust management service or family law attorney. In addition, some investment brokerages and financial institutions offer trust management services.

Policyholders assign death benefits to beneficiaries and pay premium installments to the estate. The Internal Revenue Service permits policyholders to gift up to $13,000 tax-free contribution for every beneficiary on an annual basis.

By law, Trustees have to provide written notification to beneficiaries informing them when contributions are made. Beneficiaries are allowed to withdraw maximum contributions, but must do so within 30 days from the date of notification. They can also elect to leave the money in the trust so there will be a larger distribution when the estate is settled.

For the most part, people establish irrevocable life insurance trusts to provide heirs with sufficient funds to cover estate and inheritance taxes. Remember, this is used by the wealthy and taxes can equate to millions of dollars.

One attractive feature of irrevocable trusts is policyholders can arrange installment payments that are presented to beneficiaries when they achieve certain accomplishments. These might include getting married, having a child, graduating from college, or starting a company.

Another feature is policyholders can arrange a Dynasty trust that does away with taxes for beneficiaries of future generations. Also referenced as generation skipping trusts, the grandchildren and great-grandchildren of policyholders can be exempt from inheritance tax.

Irrevocable life insurance trust offers several advantages that make it a powerful estate planning method. Trusts have to comply with specific guidelines and properly be documented.

About the Author: Estate planning is important for everyone regardless of wealth status. Discover valuable resources about probate, trusts, estate and inheritance taxes, and

irrevocable life insurance trusts

from California probate liquidator, Simon Volkov at

SimonVolkov.com

.

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