What is a life insurance trust?

A life insurance trust often called an "ILIT", is a trust that holds your life insurance policy. 

These trusts cover the distribution of your policy death benefits after you’re gone, and they can help you save on estate taxes. In fact, a proper life insurance trust can save you SIX FIGURES OR MORE in estate taxes if you have a large life insurance policy! These types of trusts are irrevocable, so they cannot be changed after your passing, which means that no one can alter your wishes after your death. 

When you die, the life insurance policy pays out the proceeds according to the trust terms that you choose. If you have young children, you can spread the disbursements over time, rather than lump-sum, which is a big plus. If you’re divorced and have young kids, you can put control of the funds in the hands of a trustee of your choosing, as opposed to your ex. But the biggest advantage is the estate tax savings they provide. 

Estate taxes can eat away at your family's inheritance in a BIG way, especially in Massachusetts! Having a life insurance trust in place can ensure that your loved ones receive the full benefit of your life insurance policy. Without the trust, the policy could end up being used to pay estate taxes.

A life insurance trust can remove the value of life insurance proceeds from your taxable estate.

Why is this important? Because Massachusetts has an incredibly low threshold for estate taxes. Most people don't realize that life insurance proceeds become part of your taxable estate when you die. That's exactly how the government wants it. While the insurance payout is not income taxable, it is estate taxable! You might not have over $1 Million while you're alive, but when you die, the life insurance proceeds are added to your other assets to determine your taxable estate, and you're now a millionaire. Congratulations, your beneficiaries now must pay estate tax. A life insurance trust can be sure that the money stays with your beneficiaries instead of going to Uncle Sam.

Not only do life insurance trusts provide peace of mind that your loved ones will be financially secure, but they also offer protection from Federal and Massachusetts estate taxes, as well as probate avoidance. The return on investment for life insurance trusts is clear - they are an essential tool to avoid estate taxes for anyone with a life insurance policy and looking to protect their loved ones after they are gone.

This is an expert-level technique and should not be done by attorneys who “dabble” in estate planning.

Do it wrong, and it’s all for nothing.

If you have any questions about life insurance trusts, or if you would like to set up a trust of your own, please contact our office at 978-657-7437. We would be happy to help you get started! You can also book an appointment with one of our experienced attorneys at www.BookMyPlanningSession.com.