What is the purpose of a life insurance trust?

A life insurance trust provides one with more control over one’s insurance policies and the funds that are paid from them. It also allows one to lower or remove estate taxes so that a larger portion of the estate can be left for one’s beneficiaries. The insurance trust has ownership of the insurance policies, thereby excluding the policies from one’s estate.

Upon transferring one’s insurance policy to a trust, if the estate is still required to pay estate taxes, one can lower the estate tax by allowing the trust to purchase more life insurance. In so doing, the trust will be excluded from one’s estate, and thus, the proceeds will also not be subject to estate taxes. And since insurance proceeds are immediately available following one’s death, there is no requirement that the assets be liquidated in order to pay estate taxes.
When establishing an irrevocable life insurance trust, the grantor is the creator of the trust, and the trustee is chosen by the grantor to manage the trust. The beneficiaries who are named in the trust will be the recipients of the assets contained within the trust following the death of the grantor. The trust buys the insurance policy in which the grantor is the insured while the trust is the owner and, in most instances, the beneficiary. Upon payment of the insurance proceeds following the death of the grantor, the trustee will accumulate the funds, which will be used to pay estate taxes and other expenses, and then disburse the remainder to the beneficiaries.

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