There is no easy answer as to whether a life insurance policy should be put into a trust. The best answer is that it depends on your individual situation, the size of your estate, and what type of trust you are considering.
For example, if you're single, and your net estate, which is your assets minus debts, is less than $ 1 million dollars, you may not need a trust, or you may want to put your life insurance into an irrevocable life insurance trust (ILIT). If you're married and your net estate is less than $ 2 million dollars, you may choose either a living trust, an irrevocable life insurance trust, or no trust at all.
There are two types of trusts that I will discuss; a living trust or an irrevocable life insurance trust. There are benefits and drawbacks to both trust instruments.
A living trust is an estate planning tool that allows you to manage your assets while you are alive and pass them down to your family upon your death without the need for probate proceedings.
A living trust has a Trustor (also called Grantor), which is the person who owns the trust and transfers property into it. A trustee is the person who receives the assets on behalf of the Trustor. It is possible with a living trust, to be both the Trustor and the Trustee. There is also a beneficiary which is the person or persons who benefit from the terms of the trust. Since this is a living trust, you can be the primary beneficiary during your lifetime, therefore making you the Trustor, Trustee, and the Beneficiary.
In addition, living trusts normally have instructions for managing the assets during your life, and instructions on what happens when you die.
A living trust is revocable. This means that you can change, amend or end the living trust at any time during your life.
Because right now there are no estate taxes on an estate worth less than $ 1 million if you are single, and less than $ 2 million if you are married, a living trust may be a good place to put your life insurance policy. But there is another option.
An irrevocable life insurance trust is an estate planning tool designed specifically for life insurance polices. If you have a substantial net estate that is going to be subject to estate taxes, an irrevocable life insurance trust might be a good option. Because a life insurance policy placed in an irrevocable life insurance trust no longer belongs to you, it can not be included in your taxable estate.
There are some major drawbacks to an irrevocable life insurance trust. For example, once an irrevocable life insurance trust is created it can not be changed, amended, nor ended during your lifetime.
Secondly, you can not change the beneficiary of your life insurance proceeds in an irrevocable life insurance trust. So, for example, if your spouse is the named beneficiary in your irrevocable life insurance trust, and you got divorced, your ex-spouse would still be entitled to your life insurance proceeds.
Also, if you have an existing life insurance policy and place it in an irrevocable life insurance trust, but die within 3 years of the transfer date, the trust will not be protected from estate taxes.
The truth is once you have an irrevocable life insurance trust you are committed to it for life, there's no turning back. If you're not sure you want this life insurance policy the rest of your life, than an irrevocable life insurance trust may not be the way to go.
The bottom line is this: if you are thinking about putting your life insurance policy into a type of trust instrument, you will want to consult with your accountant, financial planner, and / or an experienced attorney. The laws regulating certain trusts vary from state to state, so you might want to make sure you have all the facts before entering into such a document.
Each individual's financial situation is different, so it might be wise to gather all the information you need to make an informed decision and then decide if you need to speak with a qualified professional.
The one thing that is for sure is that there is no need to pay more for life insurance than you need to. You shouldnt compare You life insurance quotes from at least 3 different companies before you choose a policy.