People take up life insurance for different reasons. The most common reason is that it acts as a financial vehicle that gives proceeds to loved ones and other survivors in order to pay a debt, meet living expenses and other personal plus business needs. In addition to this, life insurance can also be used in estate planning. Life insurance can help in both funding the process and the flexibility of the process too. This is mostly the application of life insurance when used in trusts.
Life Insurance and Estate Taxes
Putting life insurance inside trusts helps to pay off estate taxes, which have been known to go as high as 55% of the estate value. These taxes are often from the state and due nine months after the estate owner’s death. If family members cannot raise the money, they might result in selling assets such as family heirlooms. However, life insurance can proceed to pay for all this.
Trusts and Estate Planning
Trusts also play an important role in estate planning. One is that trusts can help set aside taxable assets from the estate, and in the process, lessen the potential estate tax liability. When trusts are set up for this reason, the trust is listed as the owner of the policy, and this exempts the proceeds being considered in the estate value. This, therefore, helps reduce the estate value.
Benefits of Life Insurance in Trusts
There are many benefits to establishing life insurance inside trusts. One, there will be available funds for the payment of estate taxes among other expenses that may result from the passing of the policyholder. Two, the proceeds of the life insurance are removed from the estate of the insured. Three, the beneficiaries of the life insurance will receive the proceeds income tax-free. Four, the policyholder has the reins on how the proceeds from the life insurance will be used. Five, the life insurance will ensure that there is available income for the surviving spouse to use. In this case, the life insurance proceeds will not be included in the estate.
When people are setting life insurance into trusts, they tend to go with the Irrevocable Life Insurance Trust. This is because this kind of trust helps protect the cash value of the life insurance policy from creditors during the policyholder’s lifetime and then protects the proceeds of the policy upon death. In the event of an ILIT, the trust is named as the owner and beneficiary of the policy.