Why Do People Put a Life Insurance Policy in a Trust?
Life insurance is a key part of the estate plan of many people. Indeed, more than half of Americans are the beneficiary of one or more life insurance policies (CNBC). You may want to put life insurance into a trust in order to carry out your estate planning strategy. Here, our St. Petersburg estate planning lawyer explains why putting life insurance in a trust may be the best option for you.
Three Potential Benefits of Putting Life Insurance in a Trust
1. Exercise Control Over Distributions
A simple beneficiary designation pays proceeds in a lump sum. A trust allows the policyholder to dictate how and when funds are used. The trustee distributes proceeds according to terms set in the trust agreement. Why does this matter? It is especially important when you have beneficiaries who are minors, have disabilities, or require financial oversight. Trust provisions can restrict access, provide installment payments, or earmark funds for specific needs such as education or medical care.
2. Manage Estate Tax Exposure
While life insurance proceeds are not subject to federal income tax, they can be included in the insured’s taxable estate. Under 26 U.S.C. § 2042, if the insured retains incidents of ownership, the death benefit may be part of the gross estate. For high-net-worth people, the inclusion can trigger federal estate tax liability. An irrevocable life insurance trust (ILIT) removes ownership from the insured. That can reduce the risk of estate tax liability. If you have any questions about estate taxes, our St. Petersburg estate planning lawyer can help.
3. Protect Assets from Creditors
Trusts can be a highly effective asset protection tool. Indeed, that is one of the most common reasons why trust planning is part of an estate plan. A trust may be able to protect life insurance proceeds from outside claims. When structured correctly, an irrevocable life insurance trust (ILIT) or other trust arrangement can keep proceeds beyond the reach of creditors of the beneficiaries. The protection also applies in the context of divorce, where trust-controlled funds may be insulated from equitable distribution. In Florida and under federal law, creditor protection is not automatic. It depends on the trust language.
Should I Put Life Insurance in a Trust?
It depends. As noted above, there are absolutely benefits to putting a life insurance policy in a trust. However, it is not necessary for every situation. Indeed, the advantages may not actually be very useful in your case. A St. Petersburg, FL estate planning lawyer can help you determine the best strategy for managing life insurance as part of your estate plan.
Contact Our St. Petersburg Estate Planning Attorney Today
At Fisher & Wilsey, P.A., our St. Petersburg estate planning lawyer puts people and families first. If you have any questions about life insurance and estate planning, we can help. Contact us today for a fully confidential initial appointment. We provide estate planning services in St. Petersburg, Pinellas County, and throughout all of the region in Florida.
Source:
cnbc.com/select/half-of-americans-dont-have-any-life-insurance/
