The pros and cons:
Some advantages:
Irrevocable life insurance trusts solve two key problems: Because the insured must create the trust, you avoid disrespecting the deceased by accidentally (or purposefully) having the insurance proceeds paid to beneficiaries against his or her wishes. Additionally, the insurance proceeds will not be taxed upon the death of the insured.
The irrevocable trust allows assets to be passed on to children free of the gift and estate taxes.
If the estate’s worth exceeds two million dollars, the life insurance policy could suffer a heavy 45% tax on its proceeds. Irrevocable trusts avoid this tax altogether.
Irrevocable life insurance trusts can save $450,000 in estate taxes on a $1 million insurance policy.
This type of trust is an IRS-approved way to remove life insurance proceeds from taxable estate assets, while simultaneously keeping the proceeds available for beneficiaries.
There are some drawbacks, too:
Irrevocable life insurance trusts cannot be rescinded, amended, modified, or changed in any way once they have been created.
You cannot borrow money from an irrevocable life insurance trust.
You can’t serve as the trustee of your own trust; trustees cannot also be beneficiaries.
Some trustees charge annual fees to administer the trust and its proceeds.
The bottom line:
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.
