Do I Need to Have an Irrevocable Life Insurance Trust?

Only one out of every three American adults has an estate plan in place. Most people who lack one believe that they don’t have enough assets to make it worth the trouble. Setting up an irrevocable life insurance trust with an estate planning lawyer could help you reduce the financial burden for your heirs when they inherit your small business or other assets that have a value of less than $11.4 million.

What Is an Irrevocable Life Insurance Trust?

An irrevocable life insurance trust is a type of fund that is backed by one or more life insurance policies. Upon your death, the life insurance policy pays out, and those monies fund the trust. The irrevocable status of this type of life insurance trust means that it can’t be changed by the court or challenged by a family member, and the court can’t revoke it. The terms of the trust are essentially set in stone once you sign it.

Who Should Have an Irrevocable Life Insurance Trust?

Anyone with a high net worth should consider setting up an irrevocable life insurance trust. Setting up this trust could reduce the estate tax burden on your heirs, especially if only a few people will inherit your assets. Federal laws around estate taxes have changed several times in the past 10 years, and the current limit of $11.4 million for an individual or $22.8 million for a couple will sunset in 2025. Even if Congress extends the current law, setting up an irrevocable life insurance trust will protect your assets and your heirs from this burden.

How Do I Set Up an Irrevocable Life Insurance Trust?

The ideal way to set up an irrevocable life insurance trust is to create the trust first then purchase the life insurance policy. When the trust pays for the life insurance policy, the policy will not become part of the taxable estate. If you buy the policy first and then set up the trust, the policy’s payout becomes part of your taxable estate if you die within three years of setting up the trust.

When Is the Best Time to Establish an Irrevocable Life Insurance Trust?

The best time to set up an irrevocable life insurance trust is when you purchase a life insurance policy. If you already have a life insurance policy, it’s not too late to create an irrevocable life insurance trust. An estate planning lawyer can set this up for you at any time. There is a three-year look-back on an irrevocable life insurance trust. The trust may be dissolved if you pass away within three years of its establishment. The earlier you set up an irrevocable life insurance trust, the better for you and your heirs.

What Are the Benefits of an Irrevocable Life Insurance Trust?

An irrevocable life insurance trust reduces the estate tax burden on your heirs. It also gives you the ability to control how your death benefit is used. For example, the funds can be used to pay for the estate taxes, probate costs, trustee fees and transfer of ownership of your small business. The irrevocable life insurance trust protects your life insurance payout from creditors, liens and your ex-spouse in the event of a divorce.

Setting up an irrevocable life insurance trust gives you more control over the funds of your estate after your passing. This type of estate plan can’t be challenged, and having one may provide you with peace of mind knowing that your heirs won’t be burdened with taxes after your death. To learn more about an irrevocable life insurance trust, call 201-996-1200 to set up a consultation with a Hackensack, New Jersey estate planning lawyer at The Knee Law Firm, or complete our online contact form to have an associate reach out to you.