If you are counting on life insurance to help achieve some of your estate planning goals, it is imperative that you understand how the proceeds will be treated after you are gone. This is particularly true if you want to name a trust as the beneficiary of the policy. Toward that end, the Los Angeles estate planning attorneys at Schomer Law Group, APC discuss making a trust the beneficiary of your life insurance policy.
How Does Life Insurance Fit into Your Estate Plan?
Although there are a wide variety of different types of life insurance, the basic concept of all life insurance policies remains the same. Someone purchases a life insurance policy that includes a death benefit. The purchaser must name an insured and at least one beneficiary. The death benefit is paid out to the named beneficiary in the event of the death of the insured. With some policies the death benefit amount never changes while in others it can fluctuate. Some policies also include a cash value that can be withdrawn or borrowed against. One of the most common uses for a life insurance policy is to ensure that sufficient funds are left behind in the event of the death of a parent of minor children. Life insurance, however, can also help with things such as funding a Buy-Sell agreement for a small business or paying for a funeral and burial as part of a larger funeral planning component in an estate plan.
Making a Trust the Beneficiary
When you purchase a life insurance policy you must name at least one beneficiary. That beneficiary does not have to be a person. It can be a charity, a church, or even a trust. In fact, there are several strategic reasons why people frequently name a trust as the beneficiary of a life insurance policy. One of those is when the purchaser of the policy is the parent of a minor child. In the event of the parent’s death, the minor child cannot inherit directly from the parent’s estate. By paying out the insurance proceeds directly into a trust, the parent knows that the funds are safe and that the person (or organization) named as the Trustee will manage and protect the trust assets until the child reaches the age of majority. Another common reason to name a trust as the beneficiary is when the trust created is an Irrevocable Life Insurance Trust, or ILIT. In that case, the proceeds pay out into an irrevocable trust, the terms of which are used to plan the details of your funeral and burial service. Another benefit of an ILIT is the ability to appoint someone as your Trustee to make sure that your wishes regarding the funeral are honored.
Life Insurance, Trusts, and Estate Taxes
One important factor you need to consider when naming a trust as the beneficiary of a life insurance policy is that by doing so the proceeds may be included in your estate for federal and/or state gift and estate tax purposes. If so, you need to be sure that your estate, with the proceeds included, does not exceed the current lifetime exemption amount or your estate will be subject to estate taxes. It may, however, be possible to avoid including the proceeds in your estate for tax purposes which is one of the many reasons you need to consult with your estate planning attorney if you want to make a trust the beneficiary of your life insurance policy.
Contact Los Angeles Estate Planning Attorneys
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about making a trust the beneficiary of your life insurance policy, contact the experienced Los Angeles estate planning attorneys at Schomer Law Group APCby calling (310) 337-7696 to schedule an appointment.
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