How to Set Up a Life Insurance Trust

You can choose to set up a life insurance trust to alleviate heirs from heavy taxes imposed on your estate when you die. While life insurance itself will pass to the named beneficiary upon death, it is still subject to taxation. A life insurance trust alleviates the beneficiary of your life insurance policy from this tax burden. This is because the life insurance is owned not by you but by the trust.

Difficulty: Moderate

Instructions

Things You'll Need:

• Trustee
• Estate-planning attorney
• Investment funds

1. Determine what the purpose of the life insurance trust will be and estimate how much money will be needed to meet your goals. For example, if you wish to provide for your burial and support your family for a designated amount of time, you will need to determine how much the cost of these items will be.

2. Choose a beneficiary carefully. You cannot change the beneficiary once you set up a life insurance trust. In most cases, the beneficiary is an immediate family member.

3. Calculate the costs of having an irrevocable life insurance trust fund and determine if you can afford it for the life of the policy. You will not be able to directly pay the premiums once you purchase the life insurance policy; however, you can make "gifts" to the trust to help the trustee pay the premium.

4. Select a trustee to manage the trust. You can consider naming a trusted adult friend or relative as the trustee to purchase the life insurance policy. Another option is to appoint a bank or financial adviser to make the purchase and pay the premiums yearly.

5. Contact your estate-planning attorney to help draft and review the documents. You can also have your financial planner set up your life insurance trust, but it is best to have your attorney review the documents before you sign anything.

Tips & Warnings

• Life-changing family events such as a wedding or birth are often the best times to look into planning for your financial future and the financial future of your family.
• An irrevocable life insurance trust means that once the fund is established, you cannot go back and change or cancel the policy.
• Many people wish to name themselves trustee of the life insurance trust, but this will not allow you and your family to benefit from the trust in the manner that you would if you named a spouse or child as trustee.

[elvis314]

on 5/21/2009 I think you are a bit confused here. The reason for setting up a life insurance trust is to avoid estate taxes. The link postd by DTower5 is for personal income tax. If you have a $5M life insurance policy and have to pay 45% tax on anything >$2M, the estate will pay $1.35M in taxes and you would only get $3.65M (instead of $5M).Putting your life insurance into a trust protects the money (since you don't personally have control over the money or beneficiaries).

[familjsarv]

on 3/17/2009 SLAM - Goes the mouse tax-trap! DTower5 is both right

[DTower5]

on 1/9/2009 "You can choose to set up a life insurance trust to alleviate heirs from heavy taxes imposed on your estate when you die. While life insurance itself will pass to the named beneficiary upon death, it is still subject to taxation."

This is not true for federal income tax, as life insurance is not includable as income. See

http://www.irs.gov/publications/p17/ch12.html#en_US_publink100033029

"Life insurance proceeds paid to you because of the death of the insured person are not taxable"