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Home » Article » LA Probate Law: Life Insurance Trusts

LA Probate Law: Life Insurance Trusts

November 13, 2015Article

LA Probate Law: Life Insurance Trusts

 

A Life Insurance Trust is simply a document that acts like a very private and secure box into which you place your life insurance policy. Did you know that upon your death the life insurance proceeds will be included in your Estate? The purpose of a life insurance trust is to avoid federal estate taxes on life insurance proceeds owned or controlled by the decedent. Anyone who buys their own life insurance, or has it provided by their employer, will usually have the face value of the insurance included in their estate for federal estate tax purposes states LA Probate Law. Certain restrictions apply, and an experienced estate planning attorney can assist you in determining if establishing an Irrevocable Life Insurance Trust is right for you and your family. In general, you cannot maintain any rights to the trust to qualify for the tax benefits, so a trust must be irrevocable, and changes to beneficiaries or loans against the policy cannot be made once the trust is established.

How does a Life Insurance Trust Work?

The trustor sets up the trust and names a trustee, who will buy the insurance for the trust, using funds contributed to the trust by the trustor. After the trustor’s death, the proceeds of the insurance are paid to the life insurance trust, and then distributed to the beneficiaries of the trust, who often are the trustor’s children. If the trust has been administered properly, the proceeds of the insurance will be distributed free of federal estate taxes to the beneficiaries. Tragically, life insurance proceeds often boomerang through an unplanned estate, causing unintended tax consequences. For instance, a person may have a $1 million estate that includes a family home or small business. A $250,000 life insurance police may have come close to settling the tax liability under historic estate tax rates. But, left unprotected, the insurance proceeds are also subject to taxation, resulting in a base tax of $345,000 under the historic estate-tax rate explains LA Probate Law. The result can require the liquidation of a business to settle the tax obligation of a life insurance policy that was bought to protect the estate from taxation in the first place. A establishing a Life Insurance Trust provides for independent ownership of insurance proceeds. When the proceeds are not owned by a decedent or spouse, they will not be considered part of the estate. When administered properly, the proceeds can be distributed to beneficiaries free of federal estate taxes. In fact, the payment of life insurance principals can often be made tax free under the gift tax exemption.


Life Insurance Trust Asset Protection

Many people do not realize that the value of their life insurance upon their death becomes a taxable event. Let’s say you have property, cash and investments worth $2 million and you also have a life insurance policy that will pay your children $1 million upon your death. That $1 million will be included when the Internal Revenue Service is calculating the amount of your estate taxes; that is, if you just leave a Will and/or you don’t plan for that eventuality now. If you had an “A-B” Living Trust, your exemption would be over $2 million but that would still leave you with the $1 million life insurance policy pay out, which would be taxable. There is a way to avoid all of this pain and it’s called a Life Insurance Trust. Your insurance policy becomes an asset of your trust and the premium to be paid upon your death would be designated as “gifts.” Since you are allowed to give gifts of up to $10,000 per year non-taxable to whomever you wish, the premiums would be divided up in lots of $10,000 gifts each year for each of your children and your spouse, or whomever you designate, thus taking it completely out of your estate say LA Probate Law. A trustee is assigned to this trust just like in a Revocable Living Trust. Upon your death the proceeds of the life insurance would then go tax free to your children and you could also provide for your spouse and other family members as well. Wealth and asset protection is not only for the wealthy. These powerful, yet simple strategies should be considered by anyone with a family, business or property.

Will Your Life Insurance Payout Be Taxed?

Many people automatically assume that the life insurance death benefit they leave over to their loved ones will not be taxed. This common misconception can result in the unnecessary payment of tens or hundreds of thousands of dollars of estate taxes. The IRS (Section 2042) states that the death benefit of your life insurance policy is included in your estate if the proceeds are payable either (1) to your estate or (2) to your beneficiaries if you possessed any incidents of ownership in the policy at the time of your death. Incidents of ownership include the right to (1) change/add beneficiaries (2) transfer ownership of the policy (3) borrow against the policy, among other rights. Instead of having you own the life insurance policy in your own name, an estate planning attorney can set up an irrevocable life insurance trust (ILIT) to own the policy with the proceeds going into the trust explain LA Probate Law. If you don’t own the policy, you don’t have “incidents of ownership” according to the IRS and consequently your estate is not taxed on the proceeds of the death benefit.

LA Probate Law: Life Insurance Trusts

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Scott Schomer, Estate Planning Attorney
Scott Schomer, Estate Planning Attorney
A graduate of Boston University School of Law, Scott P. Schomer is a frequent lecturer on estate planning and elder law issues, having discussed these important issues on local and national television. A seasoned courtroom advocate, Scott has obtained combined judgments and verdicts in excess of twenty-five million dollars for his clients. Scott has served as a member of the Los Angeles Superior Court Probate Volunteer Panel (PVP Attorney), Probate Settlement Panel and a Judge Pro Tempore. Scott's expertise has been recognized by his peers with such accolades as a life-time membership in the Multi-Million Dollar Advocates Forum, the Five Star Wealth Manager designation, and repeated nominations as California Super Lawyer.
Scott Schomer, Estate Planning Attorney
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