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Life Insurance Trusts

Reduce Estate Tax Liability with Life Insurance Trusts

Are you wondering if  life insurance trusts are a good idea?  Depending on your financial situation and the manner in which your life insurance policy is structured, setting up a trust may be in your best interest, as well as that of your heirs and beneficiaries. Many people mistakenly believe that all life insurance proceeds are exempt from taxation. There are many circumstances under which life insurance is taxable. For example, if an individual’s estate is large enough to be subject to estate tax, the proceeds from a life insurance policy that he or she owns will be taxed at the estate tax rate. However, if ownership of the policy is properly set up from the commencement of a policy in a life insurance trust by an attorney, estate taxes are not applied to those proceeds. See your tax advisor/attorney for further information.

Many factors impact whether or not life insurance trusts are beneficial for particular individuals and their families. If you’re interested in learning about the implications of life insurance trusts for your specific situation, it’s advised that you consult your estate planning attorney before making any decisions and consult with your LifeInsure.com advisor to help guide you.

Three Drawbacks of Life Insurance Trusts

While there are a number of benefits associated with life insurance trusts, there are also several drawbacks. Most people who establish life insurance trusts do so to prevent their heirs from having to pay estate taxes. However, before deciding to set up a trust, it’s important to consider the limitations and implications of doing so.  Be sure to discuss your particular situation with an estate planning attorney before making any firm decisions.

Three drawbacks associated with life insurance trusts include:

  1. Beneficiary Changes are Not Allowed : Once you establish a life insurance trust, you will not be able to make changes to the beneficiary (or beneficiaries) named in the policy or of the trust.
  2. Policy Cannot Be Used as Collateral: When you establish a life insurance trust, you give up the ability to borrow money against the policy. This is because ownership of the policy is passed to the trust, and you can’t use something that you do not own for collateral.
  3. Irrevocable Decisions: Life insurance trusts must be irrevocable, which means that you can’t change your mind and decide to take back ownership of the policy. Setting up a life insurance trust is a permanent decision.

As with all other estate planning decisions, we recommend you consult with your estate planning attorney or financial advisor before making any changes to your estate plan.

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