A life insurance trust is a trust created by an individual (and sometimes the spouse) to own life insurance on the life of the individual and/or the individual’s spouse. The advantage of using the life insurance trust, rather than simply owning the life insurance outright, is that the life insurance proceeds received by the life insurance trust at the death of the individual are not included in the individual’s estate.

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Choosing Beneficiaries

 The trust will need beneficiaries to receive the assets from the trust at a future time. You choose the beneficiaries when you set up the trust. However, because the trust is irrevocable, you cannot change the trust beneficiaries at a later time. This is unlike a Will or Living Trust that you can change at a later time in response to changing wishes regarding beneficiaries. Often the beneficiaries of a life insurance trust are the same beneficiaries as under your Will or Living Trust. If you decide to include your grandchildren as beneficiaries, you will need to take into consideration the effect of the generation skipping tax. This complex tax generally applies to transfers in excess of $1,000,000 to your grandchildren or other persons more than one generation removed from your generation.


Generally, no distributions are made from the trust until after your death and the collection of the life insurance proceeds. You can then provide for immediate distribution or you can provide for periodic distributions over a period of years. Keep in mind that if the trust has loaned funds to your estate or purchased assets from your estate, the trust may be distributing the loans or the purchased assets instead of the cash from the life insurance.

Withdrawal Rights

Your contributions to the trust to pay the life insurance premiums are considered to be gifts to the beneficiaries of the trust. Generally, you will want to limit these transfers to a total annual amount of less than $10,000 per beneficiary so that your contributions will qualify for the annual exclusion. The annual exclusion will only be available if you give your beneficiaries the right to withdraw the contributions for at least a 30 day period after you make the contributions. Of course, you are expecting that your beneficiaries will not make the withdrawals. However, if they do make the withdrawals, the funds will not be available to make the insurance premiums. If you don’t give the beneficiaries the right of withdrawal, your contributions will not qualify for the annual exclusion. This means that your transfers into the trust will use up part of your "federal exclusion," an undesirable result.

If you ever need help, speaking to an estate planning attorneyis a smart idea. The cost of speaking to an attorney is often worth it compared to the possibility of making a costly mistake.

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