Life insurance trust: A powerful tool that can make the most of your policy
Like other types of trust, a life insurance trust includes a settlor (person who creates the trust) and a trustee (person who manages the assets).
Life insurance serves as a cornerstone in the estate planning of many Michigan families, providing security and peace of mind. So if you already have a life insurance policy, you may ask, “Why do I need a trust?"
A life insurance trust can provide an extra layer of control and protection in managing your policy's benefits.
Life insurance trust types
Irrevocable: An irrevocable life insurance trust (ILIT) is the most common type. Once established, you cannot modify or revoke the trust. The primary purpose of an ILIT is to exclude the life insurance proceeds from the taxable estate of the insured. By doing so, it can help reduce or eliminate estate taxes, ensuring that a greater portion of the estate goes to your beneficiaries rather than to tax liabilities.
Revocable life insurance trusts: Less common than ILITs, revocable life insurance trusts offer you the flexibility to make changes to the trust during your lifetime. This includes the ability to change beneficiaries, adjust the terms of the trust or even dissolve the trust entirely. However, because the trust is revocable, the life insurance proceeds are considered part of your taxable estate and may be subject to estate taxes.
Some reasons for setting up a life insurance trust
Estate tax advantages: For substantial estates, placing your life insurance policy in an irrevocable trust can remove the benefit from your taxable estate, potentially saving a significant amount in estate taxes. It can also be used to help pay for estate taxes.
Asset protection: Assets within a trust are generally protected from creditors. This means if your beneficiaries face legal challenges, bankruptcy or divorce, the benefits from your life insurance can be shielded, ensuring they go directly to your loved ones as intended.
Control over distribution: A life insurance trust allows you to specify how and when your beneficiaries receive the benefits. This can be crucial in several cases. For example, for minor children, beneficiaries with special needs, or if you wish to provide for your spouse first and then distribute any remaining assets among your children.
Navigating your options
Setting up a life insurance trust requires careful planning and a deep understanding of the legal landscape, including any recent legislation that may affect your planning. In addition, each trust type has specific requirements and considerations. An experienced estate planning attorney can help you navigate the complexities of Michigan law, ensuring your trust aligns with your estate planning goals and offers the maximum benefit to your beneficiaries.
Call (810) 207-6670 or complete our online form to request a free phone consultation.
Buzz Suuppi
Buzz started The Plan Firm for his family, which is everything to him. Every member of his team is committed to providing effective estate planning and related solutions for families in St. Clair County, Michigan.