Insurance trust

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Insurance Trust

An irrevocable trust set up by a policyholder in which he/she places his/her life insurance policy. This removes the policy from the policyholder's estate, shielding it from estate taxes. Importantly, the insurance trust must be set up at least three years prior to the death of the policyholder in order to exclude it from the estate. One might set up an insurance trust in order to set aside cash to pay estate taxes otherwise owed, or to provide for the policy's beneficiaries without concern for the tax. Normally, one sets up an insurance trust when one expects to have an estate worth more than the maximum exclusion figure. It is also called an irrevocable life insurance trust.

Insurance trust.

You set up an insurance trust to own a life insurance policy on your life. When you die, the face value of the policy is paid to the trust.

That keeps the insurance payment out of your estate, while making money available to the beneficiary of the trust to pay any estate tax that may be due, or to use for any other purpose.

If you're married, you may set up an insurance trust to buy a second-to-die policy, which pays the face value of the policy at the death of the second spouse. That allows the first to die to leave all assets to the other, postponing potential estate tax until the survivor dies. At that point, the insurance benefit is available to pay any tax that might be due.

References in periodicals archive ?
The policy needs to be transferred out of Bob and Joan's estate to a newly created irrevocable life insurance trust for the benefit of their sons.
Even an Irrevocable Life Insurance Trust can be dissolved via a Family Settlement Agreement with signatures from all parties.
Where the life insurance continues to require payment of premiums after the gift, a typical irrevocable life insurance trust plan will call for the insured to make annual gifts to the trust to cover the premium payments.
* Irrevocable life insurance trust. Life insurance not only provides financial security to surviving family members, but it can also create liquidity to pay for estate taxes.
As with any estate-planning decision, you shouldn't postpone creating an irrevocable life insurance trust once you determine that you need it.
Included is a sample irrevocable insurance trust, drafting suggestions for using irrevocable life insurance trust, and client letters.
Also new, Figure 15-1 does a particularly good job of depicting the evolution of beneficiaries and taxation of the irrevocable life insurance trust. Later, in chapter 17, Miscellaneous Lifetime Planning, Figure 17-1 concisely summarizes the taxation of the major trusts used in estate planning.
You may wish to consider, for example, the creation of a revocable living trust or an irrevocable life insurance trust. Another consideration would be to find the most effective way to minimize the excise tax on "excess" retirement benefits or the generation-skipping transfer tax.
A more complex strategy may involve the use of a charitable remainder trust (CRT) combined with an irrevocable life insurance trust (ILIT) to replace the wealth given away.
In a Graegin loan transaction, a family entity or trust (e.g., an irrevocable life insurance trust owning the life insurance) can loan cash to a cash-strapped estate to pay taxes.
And if establishing a legacy for heirs is desired, the donor can also set up an irrevocable life insurance trust, the policy proceeds replacing at the donor's death the assets given to charity.
* Create a grantor irrevocable life insurance trust (ILIT) funded with annual exclusion or lifetime exemption gifts.