A life insurance trust can help an individual and their estate avoid estate taxes and have asset protection at the same time. Generally, a life insurance trust is irrevocable. An irrevocable trust means that once an individual sets up the trust, they will not be able to change it readily. By giving up the power to change the trust, the individual no longer has access to the assets protected by the trust. Therefore, the assets can usually avoid additional tax liability.
Many people purchase a life insurance policy to leave money and funds for their loved ones when they pass away. When the individual passes away, the value of the policy is counted in the gross estate amount when determining the tax liability the estate will be required to pay.
If the taxable value of the estate exceeds the federal lifetime transfer tax exemption, the life insurance policy, as well as the rest of the estate, is subject to federal income tax. In 2022, the federal income tax exemption is $12.06 million for an unmarried individual and $24.12 million for a married couple.
By being proactive and setting up an irrevocable life insurance trust, the individual may save their estate thousands of dollars in taxes. Due to the complicated nature of the tax codes and writing a trust which must comply with specific tax codes, it is important to work with an experienced attorney to create the trust.
California Life Insurance Trust Attorneys
Without life insurance, families can face financial catastrophe if the family income is lost due to the death of the primary earner. If you are considering establishing a life insurance trust, you need an experienced estate planning attorney on your side to help you navigate the process. Botti & Morison Estate Planning Attorneys, Ltd. understands the intricacies involved in trust administration and can assist you and your loved ones.
We look forward to working with you. To schedule your first confidential consultation, call (877) 585-1885 today. Botti & Morison Estate Planning Attorneys, Ltd. assists clients throughout the state of California including Ventura, Westlake Village, San Luis Obispo, Bakersfield, Valencia, and Santa Barbara.
Information Center
- Restrictions Of A Life Insurance Trust
- Funding A Life Insurance Trust
- Who Should Consider A Life Insurance Trust?
- Additional Resources
Restrictions Of A Life Insurance Trust
For a life insurance trust to work, there are mandatory restrictions it must contain to be valid under the tax laws. The first is that the trust must be irrevocable. The grantor, the individual creating the trust, must not be able to have any possession or ownership over the life insurance policy. This can include being the trustee or having control over the trustee. A trustee is an individual in charge of making decisions regarding the life insurance trust.
For a trust to be irrevocable, the grantor must be unable to:
- Change any trust terms
- Alter the beneficiaries
- Cancel the policy
- Use the policy as collateral
- Take any other actions related to the trust or the life insurance policy
Losing control over the policy results in reduced estate taxes after the grantor passes away.
Funding A Life Insurance Trust
Funding a life insurance trust involves putting assets into a trust to make it valid. The grantor can put an already existing policy into the trust once it is created. However, the current tax regulations state that if an existing policy is transferred into a trust, it will still be considered a taxable asset for up to three years after it has been put into the trust. In this case, if the grantor passes away within three years of putting the life insurance policy into the trust, the life insurance will be considered taxable.
However, if the trustee purchases the policy and places it directly into the trust, the three-year period does not apply. Suppose the grantor is considering purchasing life insurance. In that case, it will be beneficial to have the trust set up before buying the policy.
When the life insurance premiums are due, the trust must have the income to pay the premium. The grantor cannot pay the premiums directly to the life insurance company without losing the estate tax exemption. When the trust is initially set up, the grantor can transfer assets that will produce income to pay the premiums. The grantor may also be able to make cash gifts to the trust that will allow the trustee to pay the premiums.
It is important to note that the trust is not excluded from paying federal gift taxes regarding the transfers and gift contributions to the trust to pay the premiums. Therefore, when funding a life insurance trust, it is essential to know the types of transfers that may cause a gift tax and what will trigger the trust to fail to create the estate tax strategies the grantor is seeking.
Who Should Consider A Life Insurance Trust?
A variety of individuals should consider creating a life insurance trust. Depending on their goals and financial net worth, a life insurance trust may be a good option. If the primary objective is to avoid federal estate taxes or protect assets from creditors, a life insurance trust may be the answer.
If an individual has other goals that are more important to their personal situation, there may be other alternatives that will still allow them to accomplish those goals while retaining control over their assets. The only way to know the best course of action for each situation is to meet with a qualified estate planning attorney to best accomplish personal financial objectives.
Additional Resources
Investing / Financial Professionals | State of California Attorney General – This website provided by the State of California Attorney General provides resources for how to start planning your financial affairs. It is a good starting point to understand what to speak about with your attorney.
California Unclaimed Property | Office of California State Controller – Sometimes assets can go unclaimed. This resource provides the State of California searchable database for the property that you or a loved one may be owed.
Westlake Village Life Insurance Trust Lawyers | Los Angeles County, CA
If you are interested in learning more about life insurance trusts, contact Botti & Morison Estate Planning Attorneys, Ltd. Our lawyers provide advanced estate planning services for all Californians and can help you set up an effective insurance trust. We can also review your existing life insurance trust if you desire to make amendments.
Botti & Morison Estate Planning Attorneys, Ltd. has offices in Ventura County, San Luis Obispo County, Los Angeles County, Kern County, and Santa Barbara County. Call (877) 585-1885 to arrange your first confidential consultation today.