12.04.2013

Requirements for Establishing an Irrevocable Life Insurance Trust - Finance - Estate Plan Trusts

Irrevocable life insurance trust refers to an estate planning method used to exempt insurance proceeds from taxation. When this type of trust is setup ownership of the policy is shifted to the estate. This permits proceeds to be dispersed to heirs without undergoing probate.

Putting together an irrevocable life insurance trust necessitates help from an estate planning specialist. Irrevocable implies the insurance policy cannot be modified once its finalized, so policy owners need to carefully consider payment conditions and specified beneficiaries. The only way to stop paying insurance premiums is the forfeit the policy.

This kind of trust is often used by people that own more than $2 million in estate assets. Estates valued less than this amount will not require irrevocable life insurance trusts because the IRS allows beneficiaries to take inheritance tax deductions via their personal tax return.

Policy owners typically setup irrevocable trusts to offset the cost of estate taxes for beneficiaries. Trusts can also be arranged to accommodate financial needs of beneficiaries.

Life insurance trusts are monitored by an appointed Trustee. This person will have accessibility to sensitive information and basically knows intimate details of the policy owner's personal finances. The Trustee cannot be changed once the trust is in place so it is vital to make a sensible selection.

One exception is that Trustees can be dismissed for failing to carry out required duties. When this happens, the policy owner needs to remit an official request through the court to ask for a change of Trustee.

The two main duties for Trustees are to pay insurance premiums and inform beneficiaries of their right to withdraw funds. If Trustees neglect these duties they could be sued for financial damages.

Policy owners frequently appoint their relatives as the Trustee, but sometimes this isn't the best decision. A better option might be to hire a trust management service or family law attorney. Additionally, some investment brokerages and banks provide trust management services.

Policy owners select beneficiaries to receive loss of life benefits and submit payments through the estate for each designated beneficiary. The Internal Revenue Service allows tax-free monetary gifts of up to $13,000 per beneficiary, per year.

The law dictates that Trustees inform beneficiaries in writing when funds are deposited into their account. Beneficiaries are given up to 30 days to withdraw funds; otherwise funds stay in the trust and accumulate.

The goal is for beneficiaries to let the money remain in the trust. While they are legally allowed to withdraw the money, it's best to let it accrue. Upon the policy owner's death, beneficiaries should have enough money to cover inheritance taxes.

Policy owners can also establish payment schedules that provide monetary distributions when beneficiaries achieve specific milestones. These usually include graduating from college, getting married, buying a first home, or starting a business.

Last, but not least, policy owners can setup a Dynasty trust that exempts taxes from earnings for future generations. This type of trust is often referred to as a generation skipping trust and is a smart strategy for eliminating taxes for grandchildren and great-grandchildren.

Setting up an irrevocable life insurance trust demands policy owners comply with guidelines, including proper documentation of funds deposited and distributed. It's vital to give careful thought when choosing a Trustee and payment schedules since conditions cannot be modified.





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