How To Set Up A Life Insurance Trust

A life insurance trust is set up to alleviate the heirs of an estate from the taxes imposed on the estate, after the death of its owner. With a life insurance policy, the estate will be taxed heavily after the death of the insured. But with a life insurance trust, the insured transfers the ownership to the trust itself. This transfer makes all of the proceeds completely estate tax-free. Below are the steps that describe how to set up a life insurance trust:

Step 1 - Purpose                                            

First, determine the exact purpose for which the trust would be set up. Also determine the amount of money that will be required to fulfill the goal of setting up the trust. Let’s say you want to provide a monthly support to your spouse after your death. Then you will have to calculate how much money will be given to your spouse in each month. Remember, once you set up the trust, it would become an irrevocable life insurance trust and you cannot pull it back without changing the entire trust itself.

Step 2 - Hiring an Attorney

The next step is to hire an estate-planning attorney, which will guide you through the drafting and reviewing processes of the irrevocable life insurance trust. Moreover, they will provide you with the required guidelines you need to follow. The guidelines can vary from time to time so their advice can be critical.

Step 3 - Selecting the Beneficiary

Now you have to select the beneficiary of the life insurance written in trust. Carefully select the beneficiary, because you can alter the document. In order to change anything on the document itself, you will need to complete an entirely new trust and record it as a replacement. The process can be long, expensive and cumbersome, so it’s best to choose wisely.

The best choice for your beneficiary option would be to select one or more family members, like your parents, your spouse or your children. They are the people who will anyway inherit your legacy. Choosing them as beneficiary will also make you sure that they will be taken care of even after you would be not with them anymore.

This much of estate tax will be levied upon you inheritor as well, after your death.  But once, you make a trust to be the owner of your policy, the proceeds will no more attract any estate tax. Now, the larger your policy the larger your saving. Besides, you can also use the “Crummy Power” to pay the premiums of the insurance policy that allows you to gift up to $13,000 in a year without attracting any gift tax.

Step 4 – Selecting the Trustee

The next step is to select a trustee. The trustee is the person who will be responsible for all the activities of the trust. You can either select someone near to you or can assign a financial advisor or bank to purchase the insurance policy. The Trustee will be the one, who will look after the disbursement of proceedings to the beneficiary and the payment of premiums.

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