Pin Me

Important Factors To Determine When Setting Up A Life Insurance Trust

written by: Jennifer A. Walker•edited by: Donna Cosmato•updated: 6/29/2011

Would you like estate tax breaks and benefits for your family? Then you may be interested in setting up a life insurance trust.

  • slide 1 of 3

    What is a Life Insurance Trust?

    In a nutshell, life insurance trusts are set up so that you can own a life insurance policy. The proceeds of the life insurance policy will fall under estate tax when the owner (if the owner is the person insured) dies. In the event that the owner decides to place this policy into a life insurance trust then you will not need to worry about paying estate tax or any tax for that matter as the proceeds will fall under exempt. You will be saving hundreds of thousands of dollars in estate tax money, considering the present 45% estate tax rate. Many people will agree that the amount of dollars saved in taxes from setting up a life insurance trust makes the whole process worth all of the hassle involved.

  • slide 2 of 3

    How do you set up a Life Insurance Trust?

    1. Ask yourself what is the sole purpose of this particular life insurance trust will be.

    2. Figure out how much financing will be needed to meet the requirements. If this is for a funeral, for instance, you're going to need to estimate the cost of all that is involved with this service.

    3. When it comes down to selecting a beneficiary, choose wisely as you will not be able to alter this detail once you set up your life insurance trust, this is completely irreversible once you have made your decision. Most people usually choose a close family member as the beneficiary.

    4. Determine what it would cost for an irrevocable life insurance trust (an irrevocable life insurance trust simply means the policy can't be altered or changed once you set it up). Considering that you can't pay premiums directly for this once you purchase it, you can send the trustee 'gifts' that will assist in funding the premium.

    5. Decide who you will select as your trustee to manage the life insurance trust fund. Do you have a close friend or relative? Select one of them as the trustee who will purchase it. Even financial advisors are not out of the question.

    6. Last but not least: You can either have whoever plans your finances set up the life insurance trust for you or simply get in touch with your estate's attorney. Your attorney will help prepare and review all of the necessary documentation. However, at the end of the day, it is in your best interest to let your attorney take care of this matter prior to anything getting signed by you.