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Irrevocable life insurance trust

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Irrevocable life insurance trust

Irrevocable life insurance trust

Irrevocable life insurance trust is a means to provide your beneficiaries with tax-free proceeds through the removal of the death benefit from your estate. It needs mentioning here that the same result could be achieved through removal of death benefit from your estate.

As the ownership of life insurance policy is transferred to a trust, the payout to your beneficiaries will not come within the ambit of taxable estate. This is because the policy will be owned by the trust, thus you no longer become the owner, and hence it is not included in the taxable estate.

However, it should be remembered that this arrangement becomes true if your assets are in excess of $2 million. If the value of your estate is less, your beneficiaries do not have to bear the cost of taxes on death benefit.

Three year rule of life policy transfer

The IRS's three year rule applies, similar to transferring ownership. The rule states that the transfer of life insurance policy must be done within a period of three years of your death. And, if you pass away before the three year period, the policy becomes part of your estate and is taxable.

Points to consider for Irrecoverable life insurance trust

The irrevocable life insurance trust makes you lose control over your life insurance policy and thus makes you incapable to make changes later. Again, setting up and maintaining trust requires more money and is a complex process. However, the following points should be kept in mind:

  • Do not remove the assets that are put into the trust.
  • No beneficiaries can be added or removed.
  • The trustee who is appointed can only be changed, provided the person agrees to resign.
  • You can enjoy tax savings through irrecoverable trusts as the income taxes on earnings are paid by the beneficiaries of the trust.
  • You become ineligible to borrow against the cash value.

Premiums payment in irrevocable life insurance

You still need to pay your life insurance premiums on time, although the trust remains with the trust. Generally, your policy is gifted to the trust and that money is used to pay the premiums. These kinds of gifts can become tax-free for up to $12,000 per beneficiary per annum.

Trustee for irrevocable life insurance

As the nature of trusts is complex, individuals are not appointed as trustee. In this case, the best choice would be to appoint your bank trust department, accountant or lawyer.


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