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Top Five Benefits to a Life Insurance Trust

A life insurance trust (LIT) is an effective estate-planning tool.

Life Insurance Trust

Simply put, it is a trust set up to contain a life insurance policy, providing tax-free cash to your beneficiaries. Owners of large estates find this form of trust to be particularly wise. A properly structured LIT can prevent your beneficiaries from paying certain taxes, protect them from creditors, provide immediate liquidity or provide specific assurances, such as ensuring your family business stays in the family. Consider the following top five benefits to adding this tool to your estate plan. Read also: Getting Quality Life Insurance Quotes in the USA.


  • Provide liquidity. An LIT provides instant cash, which allows beneficiaries to pay estate taxes without having to sell assets. For example, consider a person who has only $100,000 in liquid assets upon his death. However, he has invested in real estate amounting to over $2,000,000 during his lifetime. His entire estate is subject to a 45 percent federal estate tax, which his beneficiaries will be responsible for paying. If he set up an LIT, the life insurance amount will not be subject to the estate tax and will provide cash for his beneficiaries to pay the tax due on the parts of his estate that are subject to taxation. Thus, his beneficiaries are not forced to sell the valuable properties they have inherited.

  • Obtain tax benefits. Several tax benefits exist with the use of an LIT. If you plan to leave a substantial amount of money to your grandchildren, the funds will be subject to the Generation Skipping Transfer Tax. However, setting up a Life Insurance Trust will keep your family from owing much of this tax. Additionally, if the funds within the trust generated assets, they are not subject to income tax. Third, as mentioned above, the funds are not subject to estate tax. Conversely, a traditional life insurance policy is considered part of your estate and subject to taxation.

  • Avoid Creditors. Upon your death, creditors can take money from a life insurance policy to satisfy your debts. However, this is the not the case with an LIT. Legally, every penny in the trust goes to the beneficiaries regardless of any debts you currently owe.

  • Get more control. Setting up a trust allows the owner to structure specific provisions that are not available with traditional life insurance policies. While it is true that once the trust is set the owner looses his or her control, initially the owner has complete control over his or her assets. For example, you can structure your trust so that the beneficiary only receives it upon reaching a certain age or after demonstrating responsible behavior. You can specify what you want the money used for, including a child’s education or a business investment. You can plan for unexpected events, such as the death of the beneficiary before the owner. For example, if your married child died before you, you may wish to entail the trust to his or her children instead of it passing to the spouse. This scenario and many others can be laid out in your trust. Read also: Savvy Term Life Insurance Shopping.


There are not many drawbacks to setting up this form of trust. The main disadvantage to an LIT is that you cannot change it once it is established. You cannot alter the beneficiaries or the above mentioned specific circumstances. If you select to set up a trust, think carefully about your wishes. Secondly, you may be forced to pay a gift tax if you do not meet the annual $13,000 gift tax exclusion. Lastly, setting up a trust does require legal or accounting fees that are not generally associated with a traditional life insurance policy. However, most owners of large estates find the tax savings to out-weight these fees.

Setting up a life insurance trust is a powerful tool to add to your estate planning strategy. Find a trusted legal adviser to lead you through the process and ensure you and your beneficiaries are receiving maximum protection and financial freedom. Read also: High Rated National and Local Life Insurance Policies for Tragedy.


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