How to Set Up a Trust Fund with a Life Insurance Policy
Traditionally, life insurance was purchased to mitigate the loss of income when a family member dies. While this is still a highly desired goal for life insurance purchases, more and more life insurance policies are purchased to fund an estate, creating a financial legacy for beneficiaries. Properly establishing the trust with life insurance reduces any tax liabilities owed by the estate upon the policy paying death benefits.
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Instructions
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Hire a family estate planning attorney. Request to open a revocable living trust where you are the trustee. The revocable living trust is revocable by you, the establishing party, during your lifetime; once you die, the trust is irrevocable.
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Fund the living trust by moving all assets into the trust. This means changing the title on all properties including residences, stock and bank accounts. The trust needs to have liquid assets to pay the insurance premiums.
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Apply for life insurance with the trust as the owner and you as the insured through a life insurance agent. The trust should also be named as the beneficiary. This structure removes the life insurance from the estate and thus removes it from paying estate taxes.
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Pay for the life insurance premiums with assets from the trust.
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Tips & Warnings
The life insurance policy benefits will avoid estate and most income taxes based on this structure. Undistributed income in the life insurance policy is taxed by the trustee annually but can be distributed annually to reduce the tax consequence. Consult a tax adviser for the best strategy.
