If you carry a life insurance policy, it will be considered an investment and an asset and be included in your estate after your death. Because of this, the proceeds from that life insurance – the death benefit – can be subject to estate tax if your combined assets exceed an exemption limit set by the federal government. Life insurance trusts are one tool your estate planning lawyer can use to provide you with more flexibility when transferring wealth to your dependents. When using a trust, the life insurance death benefit would be paid out to the trust, at which point your trustee collects the funds and uses them however you, the grantor, requested. Life insurance trusts can benefit families in many ways, including the following prime benefits.
Minimize Estate Taxes
If you pass away, your life insurance death benefit is considered an asset. However, if you place your life insurance within an irrevocable life insurance trust, the death benefit proceeds are not included in your estate and are thus not taxable.
In some instances, by not including your life insurance as an asset, you may reduce your entire estate net worth below the exemption level and avoid taxes altogether.
Pay for Estate Taxes with Death Benefit Proceeds
If you do owe estate taxes, your life insurance trust may be used to help you pay for those taxes. For example, if you have accumulated an estate of $15 million that includes property, stocks, and retirement accounts, that size estate will be required to pay federal estate tax.
Your trustee could then use the death benefit proceeds from the life insurance policy to pay off that tax. This allows your beneficiaries to receive the total value of other assets outside of the trust. If your death benefit was included in the estate, it would simply add to the taxed value.
Maximize Control Over Benefit Proceeds
Life insurance trusts allow you to give detailed instructions on how your death benefit should be used. Typically, the benefit is given to the beneficiary in a lump sum or over a specific payment schedule. When you use a trust, you can provide instructions. For instance, you can hold back the funds if the recipients are too young or place funds into different investment accounts for the future.
Provide Income to Your Spouse
By placing the life insurance policy into a trust, the death benefit can be used to provide income to your spouse. This, in turn, will not increase your spouse’s estate and further affect their estate planning.
Prevent Outside Control of Your Life Insurance
In typical life insurance situations, if the beneficiary becomes incapacitated, ill, or dies, the insurance proceeds would get transferred directly to your estate. By placing the life insurance inside a trust, you can avoid this scenario.
Contact your experienced estate planning attorney at The Millman Law Group to learn more about life insurance trusts and how you can set up yours today.
Estate Planning Made Easy With Millman Law Group
Millman Law Group, PLLC is rare because it’s one of the only law firms that offer life planning in South Florida. From life care planning to the preparation of detailed estate plans, Millman Law Group has committed to serving Floridian elderly communities in Boca Raton, Palm Beach County, Ocean Ridge, Hillsboro Beach, and many other areas since 2018. Our dedicated team also specializes in special needs trusts and catering to any age demographic because we know for certain it’s never too early to start preparing you and your family for your future. For the latest news in estate planning and elder care law, follow us on Facebook, Twitter, Linked In, and Pinterest. You can also contact us at 561-463-6480.