What are life insurance trusts?

Life insurance trusts are insurance vehicles designed and setup for a specific life insurance policy and for the proceeds to be paid out to a specific beneficiary.

Basically, life insurance trusts are designed to provide a financial distribution to an individual, group or charity and because the owner of the policy is the trust, the proceeds are tax free. This can save the receiver thousands of dollars in taxes and penalties.

Of course in any financial situation, there are many rules which have to be followed.

- The insured cannot change the beneficiary named in the life insurance trusts. The life insurance trust is now the owner of the policy so as far as the insured is concerned, the results are final. So if the beneficiary is a child or relative of the insured, the distribution may not be changed which be affected by changes in family status.

- The insured naturally cannot borrow against the policy in the life insurance trusts.

- The life insurance trusts and insurance policy are irrevocable. Once in place they cannot be undone.

- An existing life insurance policy cannot be transferred to the life insurance trust for some years depending upon the state trust laws in place at location.

- The policy premiums for the life insurance trusts must be paid with some financial means which is outside of the estate tax and thus may be annually taxable to the recipient

- The insured cannot be the trustee for the life insurance trusts. Thus a trustee must be found or hired.

The tax benefits of life insurance trusts outweigh the rules and implications of setting up and maintaining the trusts if anything, to provide financial security to the beneficiary of the life insurance trust.

Life Insurance Trusts is an information source only. For legal and financial advice, please contact an attorney or financial advice professional.