Estate planning can be complicated. You want to make sure that when your time comes, moving on, from a financial standpoint at the very least, is as effortless as possible for your heirs.
Investing in a Life Insurance policy can help to ensure that your family is well taken care of after you pass. But did you know that if you, the insured, is also named as the owner, your policy will be subject to estate taxes, which means less money is paid out to your heirs?
There is a way around it however: a Life Insurance trust.
What is a ‘Life Insurance Trust’?
A Life Insurance trust is an irrevocable trust that is set up with your Life Insurance as the asset.
If you are a high net worth individual this type of trust is particularly important for protecting your family’s inheritance. At this time, the federal government will allow you to gift $5.34 million without owing any estate taxes. But for those of your leaving more, you can expect to be taxed at a rate of (at minimum) 35%.
One of the major benefits of placing your policy in a trust is that the funds can be used to pay your final expenses without having your family bear the financial burden.
What’s the catch?
The number one catch with a Life Insurance trust is that the trust must be named as the owner of the policy, and trust itself must be irrevocable. Unfortunately for the insured, that means you can no longer borrow against it. Additionally, you cannot transfer an existing policy unless you live for at least three more years.
While a Life Insurance trust forces you to give up a lot of control over your policy, it also helps to ensure that your family gets what it deserves, without having to hand over an arm and a leg to the federal government.
Source – What is a life insurance trust?
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