Naming a trust as a beneficiary of life insurance policy can have a huge benefit for people with large estates that are not taxable. It is also a great way to protect the insurance proceeds from future creditors and to help beneficiaries better manage their assets
There are a few common types of trusts that can serve as the owner or beneficiary of a life insurance policy. These trustees might include: an irrevocable life insurance trust, a living trust, a special needs trust and a spendthrift trust.
Irrevocable Life Insurance Trust
This type of trust, often referred to as ILIT, is used to irrevocably purchase insurance on the life of the grantor of the trust. This means the trust will have actual ownership of the policy, rather than the person the policy is for. This is done usually to avoid the taxing of life insurance proceeds at death under the Federal estate tax. Since the person does not actually own the life insurance policy, the proceeds are not subject to estate tax or included in that person’s estate when he or she dies.
Once a person with an ILIT dies, the insurance proceeds will be deposited into the ILIT. Usually, an ILIT is set up to provide for the other spouse during his or her lifetime, and the balance passes to the children or other named beneficiaries.
ILITs are typically used to save money on estate taxes by ensuring the life insurance proceeds would not be included in the insured person’s estate. In 2002, the estate tax exemption was only $1 million. Since 2013, Congress has raised the estate tax exemption has been raised to $5.43 million, and $10.86 for married couples. This much higher exemption means a large number of estates are no longer facing estate taxes. However, those with larger estates can still benefit greatly from the use of an ILIT. In addition, some families are still using ILITs incase the estate tax exception is lowered in the future.
Living trusts can be either revocable or irrevocable. A revocable trust is a trust where the grantor retains the right to change the terms of the trust. Historically an irrevocable trust did not permit the trust to be changed. An IPUG™ is an irrevocable trust, that does not have many of the limitations typically associated with traditional irrevocable trusts. Like the ILIT, a person who takes out a life insurance policy transfers ownership of the policy to the trust. This provides many benefits, such as letting the trust avoid probate and protecting the assets from creditors.
A spendthrift clause can be included in a trust to help protect the assets from the creditors and to help beneficiaries who struggle with managing money. Under this trust, an independent trustee is named and is given sole discretion to distribute the trust funds.
A spendthrift clause is a restriction on the beneficiary’s right to voluntarily, or involuntarily, transfer his or her rights to receive trust funds as a beneficiary. The restriction is both voluntary and involuntary, which means a creditor cannot compel a trustee to distribute the trust’s assets if the trust is a discretionary trust.
The trustee will distribute funds to the beneficiary according to the terms of the trust or at his sole discretion.
Special Needs Trust
A special needs trust is a great estate-planning tool which provides financial protection for special needs children or other family members and allows them to be eligible for government assistance. Under federal law, any inheritance greater than $2,000.00 may disqualify an individual from federal and state assistance programs like supplemental Security Income. Many special needs family members require long term care planning and large amounts of financial support.
The special needs trust can be set up so the recipient is not allowed to own any of the estate’s assets. The trust is instead structured to provide for vital expenses such as transportation, health care, and other important medical and dental expenses not covered by federal support programs.
Contact the Florida estate planning lawyers at the Law Office of David Goldman today for more information on the benefits of a trust for life insurance proceeds.