Life insurance trusts are irrevocable, meaning that once you establish and fund one as the grantor you cannot modify or terminate the trust. The trust is funded by your insurance policies meaning that the trust now owns those policies and the income generated by them.
You select a fiduciary to serve as the trustee who purchases an insurance policy, with you as the insured, and the trust is the owner and beneficiary (in most cases). After you pass away, the trustee will collect the insurance proceeds and pay them as you directed in the trust language. Most often these funds are made available to pay estate taxes, specific debts, legal fees, and estate administration costs. Any remaining funds will then be distributed to the trust beneficiaries you designated.
Some benefits of this wealth transfer tool include:
-the ability to give your spouse lifetime income that is excluded from both estates for tax purposes,
-the proceeds that remain in the trust are protected from liability and creditors,
-you can allow the trustee to make distributions to beneficiaries that may reduce some irresponsible spending if inherited outright.
-the trust provides immediate cash to pay expenses after your death.
There are very specific rules and procedures for creating and funding a life insurance trust. Consult with an experienced estate planning attorney in the Greater Baltimore area, Stouffer Legal, for more information at 443-470-3599.
