If you are thinking about purchasing a life insurance policy, or, you have already done so to provide financial resources for your family in the event something should happen to you, you should consider establishing a trust to hold the policy. Contrary to popular belief, trusts are not just for the wealthy. Trusts are a very practical part of a comprehensive estate plan for everyone, especially for families with minor children. Trusts can hold money or other assets, including life insurance policies.
How Do Life Insurance Trusts Work?
Instead of listing your spouse and children as the beneficiaries of your life insurance policy, you can name your trust and trustee. When you pass away, the trustee will manage the trust and handle the distribution of the money according to the instructions you set forth in the rules of the trust.
Advantages of Life Insurance Trusts
If you list your minor children as beneficiaries, and you pass away before they are adults, then the court would have to appoint a guardian before any benefits are paid out to them. Plus, once they have access to the cash, young adults may not know how to handle a large sum of money.
Rather than hand over this money directly to a young adult, a trust allows you to determine when and how the funds will be paid out. The trustee you have chosen must follow the distribution rules you set forth in your trust. For example, your trust can establish discretionary rules for distributions to your children, while saving to pay for your children’s college expenses. The trustee may also be directed to make distributions at certain ages, helping to ensure the money will be able to provide for your children’s needs over time rather than being received all at once.
Revocable Versus Irrevocable Trusts
There are two types of life insurance trusts—revocable and irrevocable. For some people, a revocable trust will meet their needs. This type of trust can be modified or changed at any time. On the other hand, irrevocable trusts cannot be altered once they are created. People who have a large estate may be able to use irrevocable trusts as a way to reduce or eliminate estate taxes. An irrevocable life insurance trust may also protect the insurance proceeds from any creditors your children may have.
Estate taxes are the taxes paid to the federal government when assets are transferred to the estate’s heirs. State estate taxes may also apply for some Illinois residents. Any property that has been placed in an irrevocable trust is typically not considered part of the estate when determining eligibility for estate taxes. Currently, federal estate taxes are only applied to an estate that has more than $11.4 million per person, or $22.8 million per couple. Most estates fall below this threshold and are not subject to estate taxes.
The obvious downside to an irrevocable trust is that you generally cannot use any of the assets of the trust, including any cash value to the life insurance policy. Typically, an irrevocable trust may not be revoked or altered once it has been created. If your circumstances change, and you want to change the terms of the trust, you may be unable to do so. For this reason, revocable trusts may be a better option for many people.
Contact a Naperville Life Insurance Trust Lawyer
If you need assistance with life insurance trusts, or if you have other estate planning questions, you need to speak with a skilled DuPage County estate planning attorney. Contact the team at Momkus LLC by calling 630-434-0400 to schedule a consultation.