For many parents, life insurance is an important part of protecting the family. If something happens to you, a life insurance policy can provide money to help your spouse or children pay the mortgage, cover everyday expenses, fund an education or maintain the lifestyle you have worked hard to build.
But purchasing life insurance is only part of the equation. Parents should also consider how the policy will be owned, who will receive the death benefit and how those funds will be managed after the policyholder dies.
One option is to place a life insurance policy in a trust.
Trusts can be valuable estate planning tools, but there are different types of trusts, and not every trust provides the same benefits. Depending on your circumstances and goals, a properly structured trust may provide greater control over life insurance proceeds and may offer potential estate tax benefits.
For families on Cape Cod, in Plymouth and throughout Southeastern Massachusetts, McManus Estate Planning, LLC can help you understand how life insurance and trusts may fit into your overall estate plan.
Can a Life Insurance Policy Be Put Into a Trust?
Yes. A trust can own a life insurance policy, depending on the trust type and how the arrangement is established. These are referred to as trust-owned life insurance (TOLI).
One common type of TOLI involves an Irrevocable Life Insurance Trust, often called an ILIT. An ILIT is specifically designed to own and control life insurance policies and may be used as part of an estate planning strategy.
Rather than owning the policy personally, the trust owns it, and a trustee manages it under the terms of the trust agreement. This arrangement can potentially provide benefits for estate tax planning and the management and distribution of life insurance proceeds.
However, an ILIT is not appropriate for everyone. Because an irrevocable trust generally involves giving up certain rights and control, families should understand the consequences before establishing one.
Why Would You Put Life Insurance in a Trust?
For many young families, the primary reason for purchasing life insurance is straightforward: protecting the people they love. Parents want to know that if one or both parents die, their children will have financial resources available to help pay for housing, education, childcare and other expenses.
A trust can add another layer of planning by establishing instructions for how the life insurance proceeds should be managed and distributed.
This may allow parents to provide for their children’s future needs while maintaining greater control over how and when the money is distributed.
How an Irrevocable Life Insurance Trust Works
An ILIT is an irrevocable trust designed to own life insurance. The trust is established with specific terms, and a trustee manages it. The trustee may apply for and purchase a new life insurance policy on behalf of the trust or, under certain circumstances, an existing policy may be transferred to the trust.
When an existing policy is transferred to an irrevocable trust, there are specific estate planning and tax considerations that need to be addressed. There can also be important timing rules associated with transferring an existing life insurance policy.
Because of these complexities, an ILIT should not be treated as a do-it-yourself estate planning project.
Potential Estate Tax Benefits of a Life Insurance Trust
One reason some individuals consider a TOLI or ILIT is to potentially keep life insurance proceeds outside of their taxable estate for federal estate tax purposes.
Life insurance can provide a substantial death benefit, and depending on the size of an individual’s estate and applicable tax laws, the treatment of that death benefit may be an important consideration.
Massachusetts also has its own estate tax system, making estate tax planning particularly relevant for some Massachusetts families. However, the tax consequences of life insurance and trusts can be complicated, and laws and exemption amounts can change.
An estate planning attorney can evaluate your individual circumstances and explain whether a trust-owned life insurance strategy makes sense for your family.
A Trust Can Help Protect Your Children’s Inheritance
Estate planning for parents is not just about taxes. It is also about making sure your children are protected if something happens to you.
Imagine that you have young children and a substantial life insurance policy. If the proceeds were simply paid outright to a beneficiary, that may not provide the level of protection or management you envision. Depending on the trust terms, the trustee may be able to use trust assets for expenses such as education, healthcare, housing and other needs.
Who Manages Life Insurance Owned by a Trust?
When a trust owns a life insurance policy, the trustee has an important job. A trustee has fiduciary responsibilities to the trust’s beneficiaries and must manage the trust’s assets under the trust agreement and applicable law.
The trustee may need to understand how the policy is performing and whether it continues to make sense for the goals of the trust. That can be challenging because life insurance policies can be complicated financial products.
Why Trust-Owned Life Insurance Should Be Reviewed
Life insurance should not necessarily be a “set it and forget it” asset. A policy that appeared to be a good fit when it was purchased may perform differently than originally projected. Insurance products and financial circumstances can also change over time.
A trustee overseeing trust-owned life insurance may need to consider questions such as:
- Is the policy performing as originally projected?
- When was the policy last reviewed?
- Are the premiums still appropriate?
- Has the financial strength of the insurance company changed?
- Are there newer insurance products that may better serve the trust’s goals?
- Does the policy continue to align with the family’s estate planning objectives?
Regular review can help identify potential issues before they become bigger problems. This is particularly important for parents who expect a life insurance policy to provide significant financial support for their children.
Should You Put Your Life Insurance in a Trust?
There is no universal answer. For some families, trust-owned life insurance may be an important part of a comprehensive estate plan. For others, a different ownership or beneficiary arrangement may accomplish their goals without the added complexity of an irrevocable trust.
The right approach depends on factors such as the size and structure of your estate, the type and amount of life insurance you own, your children’s ages, your financial goals and your concerns about estate taxes and asset protection.
That is why it is important to view life insurance as one part of your overall estate plan rather than a decision made in isolation.
Estate Planning for Families on Cape Cod and Southeastern Massachusetts
For parents in their 20s, 30s and 40s, life insurance is often purchased with one simple goal: making sure the people you love will be financially protected if you are no longer here.
A trust may help take that protection a step further by providing instructions for how life insurance proceeds are managed and distributed.
In some circumstances, an irrevocable life insurance trust may also be part of an estate tax planning strategy. But because trusts have significant legal and financial implications, it is important to understand both their potential benefits and limitations before moving forward.
McManus Estate Planning, LLC works with individuals and families throughout Cape Cod, Plymouth and Southeastern Massachusetts to develop personalized estate planning strategies. Attorney Keith McManus can help you evaluate whether a trust, TOLI, ILIT or another estate planning approach is appropriate for your family’s goals.
Your life insurance policy is intended to protect your family. Taking the time to coordinate that policy with your estate plan can help ensure the protection you have worked to provide is structured to support your wishes. To discuss estate planning for your family, contact McManus Estate Planning, LLC, to schedule a free phone consultation today!