As a parent or grandparent, nothing matters more than making sure your family stays protected after you’re gone. Your life insurance policy is one way you can give your loved ones financial security. But did you know that you can improve the benefits of your life insurance policy even further with a life insurance trust?
How a life insurance trust works
A life insurance trust is a caring way to provide for your loved ones and ensure they’re cared for financially after you’re gone. Specifically, you need to set up an irrevocable life insurance trust. This type of trust is permanent—you can’t alter it easily.
Instead of having the policy under your name and naming your loved ones as the beneficiaries, you can name the trust as the policy beneficiary. Then, you name your loved ones as the beneficiaries of the trust.
Benefits of a life insurance trust
Some benefits of having a trust as your policy beneficiary include:
- Estate tax benefits: Moving your policy into a trust removes it from your taxable estate. This lets you and your beneficiaries save money in estate taxes.
- Distribution control: You can decide exactly how and when your beneficiaries receive the policy payout instead of the usual lump-sum payment.
- Generation-skipping tax savings: If you want to leave your life insurance payout for your grandchildren, a trust exempts the assets from generation-skipping transfer tax.
Since you can dictate the payout distribution, this can help you ensure that your beneficiaries stay within the necessary income bracket to receive government benefits like Medicaid or disability income.
Why it’s better to set up a life insurance trust early
Take note that life insurance trusts also have some disadvantages. The main one is the three-year lookback period when transferring an existing policy to a trust.
You need to survive for at least three years from the date of the policy transfer. If not, the policy proceeds will remain part of your estate and subject to estate taxes.
Looking ahead to secure your family’s future
An irrevocable life insurance trust ensures your insurance proceeds go exactly to the people you want to receive it. Consulting a skilled estate planning attorney may help you identify more ways to secure your loved ones’ future using trusts.