The Meaning Behind Irrevocable Life Insurance Trusts
Irrevocable life insurance trusts are a great way to ensure that your current and future family members will always have the financial resources they need. For many, setting up a life insurance trust is a natural next step once they’ve purchased the life insurance policy for themselves or their spouse. The life insurance policy remains in effect as long as premiums are paid, but one of the benefits of an irrevocable trust is that it can help you protect and grow the funds even if you live longer than expected and require lifelong care. Irrevocable trusts can also help provide peace of mind for those who worry about what will happen to their loved ones if they should die unexpectedly. Read on to learn more about these irrevocable life insurance trusts.
What are Irrevocable Life Insurance Trusts?
Life insurance trusts are one way to protect your family without giving up your future income. Irrevocable life insurance trusts work in much the same way that other irrevocable trusts do, with the exception that they are established specifically for the purpose of holding a life insurance policy.
When you set up an irrevocable trust, you transfer ownership of the policy to the trust and appoint yourself or another individual (known as a trustee) to manage it. The person who created the trust is no longer in control of the funds or able to use them however they want; instead, he/she can only receive what you’ve legally designated.
These irrevocable trusts will ensure that your current and future family members will always have financial resources even if you should pass away unexpectedly.
Here’s how it works: before establishing an irrevocable life insurance trust, you purchase a life insurance policy on yourself or your spouse for a face value amount of at least $100,000. Once this is done, you establish an irrevocable life insurance trust and transfer ownership of that policy into it. You then specify who should receive those funds upon your death using a beneficiary designation form provided by your life insurance company.
Benefits of Irrevocable Life Insurance Trusts
Irrevocable life insurance trusts offer many benefits. One of the main benefits is that they can provide financial security for spouses and other family members for as long as they need it. If you set up an irrevocable trust, your beneficiaries will be able to access the cash from the trust at any time beginning upon your death.
Plus, Irrevocable life insurance trusts can help protect your assets from lawsuits and other creditors. This feature makes them a great option for those who worry about what would happen to their loved ones if they died unexpectedly and left behind large debts.
If you’re considering setting up an Irrevocable life insurance trust, we recommend speaking with a qualified estate planning attorney or tax professional before doing so.
How to set up an Irrevocable Life Insurance Trust
Setting up an irrevocable life insurance trust is a fairly straightforward process, but it does require some planning ahead.
The first step is to purchase a life insurance policy for yourself or your spouse and then pay the premiums on that policy for as long as you want the policy to stay in effect. You can also transfer an existing lump sum or term premium policy to the irrevocable trust if you’ve already purchased one.
Next, you need to complete and sign a trust document so that there are clear-cut terms outlining who will receive the funds and how they will be dispersed should something happen to you and your spouse. You’ll also need to designate someone as the trustee who will handle any issues arising from your death or disability. The trustee will need power of attorney over your finances, healthcare decisions, etc., until such time as your children reach adulthood (or other designated age).
How Much Does It Cost?
The cost of your life insurance policy is one factor to consider before setting up an irrevocable trust. If the premiums are still affordable, you may want to keep the money in your original policy. However, if you feel that the cost of the premiums will be burdensome for your current or future family members, then an irrevocable trust could be a good option for you.
Irrevocable trusts typically cost more than life insurance policies, but this doesn’t mean they’re not worth it! The benefits of an irrevocable life insurance trust include further protection for your family and greater tax advantages than what you currently receive by owning a life insurance policy.
Irrevocable Life Insurance Trusts are a form of asset protection that can help you protect your estate from creditors. To establish an Irrevocable Life Insurance Trust, you can transfer your life insurance to a trustee so that the proceeds from the life insurance policy are not subject to probate. With this type of trust, it is important to have an attorney draft the document so that it reflects your wishes.
In addition, there are two types of Irrevocable Life Insurance Trusts: a Grantor Trust and a Non-Grantor Trust. A Grantor Trust is a trust created by a person who contributes assets to it and is also its trustee. The assets will pass to the remainder beneficiaries without going through probate. A Non-Grantor Trust is a trust created by someone other than its beneficiary and the assets will not pass to the beneficiary without going through probate.
The cost of establishing an Irrevocable Life Insurance Trust will vary depending on which type of trust you establish and how much money you put into it. The cost of an Irrevocable Life Insurance Trust can range from $2,000-$10,000.