Irrevocable Life Insurance Trust

An irrevocable life insurance trust allows an insured to pass on a policy’s proceeds untaxed to a number of beneficiaries. Irrevocable trust lawyers can help you determine the best setup – legally and practically – for these trusts.

What is an irrevocable life insurance trust?

A trust can be defined as the holding of property managed by one person for the benefit of other people. Irrevocable life insurance trusts are non-amendable, which means they cannot be changed after they are founded, but more on that a little bit later.

Irrevocable life insurance policies can be part of one or more insurance policies.

One way the funds from this kind of trust begin to work is upon the death of the insured (the original insurance holder). This would have been stipulated in the trust’s wording. So upon the death of the insured, the money is legally given into the hands of the trustee, who invests the proceeds and administers the money for the beneficiaries, according to the methods outlined in the contract.

Many people who are unfamiliar with how irrevocable life insurance trusts work worry that the proceeds from the trust will be subjected to what’s called the estate tax. (Life insurance policy proceeds are taxed this way.)

It makes these people uncomfortable that the federal government would tax the proceeds from a loved one who has passed away. They find it disrespectful. But it’s legally possible to avoid the estate tax. In the United States, ownership of the trust must be deemed legally “proper” for the proceeds to escape the estate tax. If the policy is or was owned by the insured (the person who passed), then the proceeds will be taxed. That is one reason irrevocable life insurance trusts exist; they are set up so that the proceeds are delivered by somebody other than the insured, and thus they avoid the estate tax.

The trust is established for the expressed benefit of the insured’s immediate family, like a spouse and children. It is established through a written trust agreement: The individual – the insured – “irrevocably” transfers the current insurance policy to a trustee. That specially designated person maintains the hold on the property for the benefit of the individual’s chosen beneficiaries, like the next of kin, the spouse, or children.

The trustee holds, manages, and distributes the property to the beneficiaries upon the passing of the trust’s creator (the insured), or however the trust specifies the proceeds should be made available.

That’s where the trust fund lawyers come in.

How do lawyers fit into the picture?

Irrevocable life insurance trust lawyers can counsel from the initial to the final stages of the establishment of the trust.

With a lawyer, you first determine a need to establish one of these trusts.

Second, you work together to establish the terms of the trust, decide on the beneficiaries, and make a decision as to who will be the trustee.

Third, the clients may undergo a medical exam. This is to determine whether the clients are insurable.

Fourth, the lawyer drafts a trust agreement. Then, if the trust pleases the needs of all the parties, the trust is signed. The trustee will need an employer identification number for this stage so keep that in mind as you consider trustees. You may want to inform them of this need in advance.

Fifth, the trustee applies for a life insurance policy as the owner of the policy.

Sixth, the trustee completes the application and pays the premium on the trust.

Life insurance trust lawyers can also provide valuable estate planning advice. They know all the proper ways irrevocable insurance trusts are established. That means they are familiar with the ways in which the trust can avoid being taxed as an estate asset, and ways the trust can also avoid the gift tax.

Some questions for the trust lawyer:

How can someone create an irrevocable life insurance trust to suit his or her needs? Is it necessary to go through an insurance company? Will the trust be subject to the estate tax after the passing of the insured? Will the insurance proceeds be taxed?

Who should check out a law service for this trust?

Perhaps the biggest reason to establish an irrevocable life insurance trust is in order to provide benefits to the insured’s spouse and family without having those benefits be a part of the survivors’ estates (because those estates would be taxed).