What is a life insurance trust? In most cases it’s an irrevocable life insurance trust meaning you can’t reverse it or “revoke” it once it’s started. A trust owns the policy through a trustee – a person or institution such as a bank. The trust would have beneficiaries – usually the children.
The purpose of an irrevocable life insurance trust (ILIT) is to have someone or some entity (in this case a trust) own the life insurance, so that this special kind of property called life insurance will not be owned by the insured person or persons. You do this so that when the insured person or persons die, the life insurance benefit is not in the insured’s estate (it’s not their property – it’s owned by the trust) and thus the insurance proceeds will not be taxed for estate tax purposes.
Here’s what happens if someone bought $3,000,000 of life insurance but not in an ILIT, with children as the beneficiaries . Let’s assume their net worth put them in in the 50% estate tax bracket: Life insurance benefit = $3,000,0000 . Estate taxes = $1,500,000. Benefits to children = $1,500,000. What if life insurance were purchased with an irrevocable life insurance trust?
The result would be Life insurance benefit = $3,000,000. Estate taxes = 0. Benefits to children = $3,000,000. When buying life insurance you should look into the use of life insurance trusts. Call the experts at lifeinsure.com who can help you set up your life insurance in the right way. You would go to your attorney to draft any trusts.