Controlling Life Policy Proceeds

Life insurance is complicated enough; why complicate it more by putting it into a trust? Here are five good reasons to consider setting up an irrevocable life insurance trust for your policy.

1. Some or all of your heirs are minors.

Life insurance is a great way to make sure your children are taken care of in case of your untimely demise, but what happens if the beneficiary of your plan, whom you intended to be the guardian of your children, decides that he or she is not willing to take on that responsibility? Does that person still receive the life insurance? Yes, he does. Hopefully, he would have the integrity to ensure that the money is still used for the care of the children, but the law does not require him to do so.

When you create a life insurance trust, you can name your children as beneficiaries of and create rules about how the money is to be used. With careful planning, you can ensure that each of your children is well taken care of through the end of their college years.

One caveat: Keep in mind that if you are married, your surviving spouse needs to be taken care of as well. Make sure you don't leave your insurance solely to your children if you are married!

2. Your heirs are not responsible with money.

In many relationships, one person is a saver and the other a spender. If your spouse is the spender, you may want to put your cover into a trust even if he or she is your only heir. This will allow you to have the benefits paid out over time instead of all at once, keeping your spouse from spending the entire windfall in a short period of time.

3. Your heirs have debts.

Whether your intention is to pay off your heirs' debts or not, this may well be a good idea for heirs who have bad debts. If you do want the money to be applied toward the debts, you can specify that in the trust. This keeps them from squandering the money on frivolous things without taking care of his or her debts first. On the other hand, if you want them to take care of their own debts, you can specify that the insurance money be used for other things. Either way, the trust helps ensure that your wishes are carried out.

4. You don't want your heirs to be stuck paying estate taxes on the insurance proceeds.

Although the proceeds are exempt from income taxes, they may be subject to estate taxes if your estate is large enough. You can keep them out of your estate by setting up an irrevocable life insurance trust. In order to keep the proceeds of the policy from being subjected to estate tax, the trust must be both owner and beneficiary of the policy.

5. You want your heirs to be able to use the insurance money to pay the estate taxes.

In addition to keeping the insurance proceeds out of your estate, you may actually want your heirs to be able to use the money to pay the estate taxes that will be due on the rest of your estate. This is an especially good idea if most of the estate is in assets that your children will not want to liquidate, such as your home or business. The proceeds can be used to pay the taxes, and your heirs will be able to use your assets instead of being forced to sell them.

Is it the Best Option?

Once it is set up, no changes can be made to the trust, so it's not something that should be done lightly. The $2,000 to $5,000 cost to set it up is also a consideration. A lawyer who specializes in estate planning can help you decide whether an irrevocable life insurance trust is the right choice for your situation.

Life Insurance - Your Questions Answered

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