Life Insurance Trusts

A life insurance trust is an irrevocable trust set up with a life insurance policy as the asset funding the trust. These trusts can be exempt from estate taxes and may be used to set aside money to pay for estate taxes.

Preparing for Estate Taxes

Although Florida has no income tax and offers many tax advantages around estates, federal estate taxes should not be taken lightly. It is important to know exactly what your estate’s tax burden may be and have a plan in place on how to deal with that, so your heirs are not left with the difficulties of doing so. Having a plan in place ahead of time saves your family time and energy, but it also prevents any squabbles around the issue after you pass.

Here is one of the classic examples we see often at Millman Law Group:

A father passes away, leaving everything to his three children. His estate includes his savings, stocks and bonds, and his home which has no mortgage. The youngest of his children wants to keep the family home, but the older children do not agree. Before passing, the father agrees to divide the estate among his children by leaving the house to the youngest and the rest of the assets are split between the older two.

Although there should have been enough money in the estate to pay for estate taxes, the money in the estate itself is taxed, and the portion of the estate left to the older children is quickly eaten up. The division is no longer even, and the children are left with a tricky situation. Depending on how the father’s will was written, two of the children may receive less inheritance or the house may need to be sold to divide things more equally. Neither are great solutions, nor were they what the father intended before he passed.

If the father in this family had planned for the taxes in advance, there should have been a simple solution: buy a life insurance policy and place it in a life insurance trust to pay for the estate taxes. It would have been exempt from estate taxes this way and could carry the burden of the taxes, preventing the sale of the home.

Plan in Advance

A life insurance trust needs to be put into effect at least three years before the death of the person insured on the policy. Though it is an amazing tool, this three-year period means that it must be something you plan for in advance. It is important to speak with a lawyer for guidance on the regulations for your state as well since some states have further rules around this trust type. There are some ways to get around the three-year rule, but they only apply in very specific circumstances. If you are in declining health and are worried you’ll miss this three-year period, please call us. We offer free consolations and can give you insight into your options.