Setting up your legacy with life insurance
Learn how a life insurance trust can ensure your policy is delivered as you intended.
For years, you’ve been taking responsibility for the ones you love most—protecting them and planning for their future at every turn. You may even already have an insurance policy and/or a will in place, to help continue to care for them well after you’re gone. When that time comes, will your plan be able to protect your loved ones? The short answer: yes.
Trusts can also help your loved ones reduce or avoid estate taxes, so you can carefully plan for their future and help relieve some of their financial burden.
Leaving behind a plan, not taxes
The death benefit of a life insurance policy is not intended to be treated as income, so your beneficiaries won’t have to pay income tax on it. Estate taxes are a different matter. If your estate is large, or if you have a significant amount of life insurance, the benefit can become subject to estate taxes.
Currently, an individual can pass on $5.6 million tax-free1—an amount that’s indexed for inflation and will rise each year. Your estate may be smaller than that, but when life insurance is added to the mix, it can push the total amount over the threshold. And remember, that’s only the federal tax threshold—some states levy tax on estates as small as $1 million.2
Careful planning can protect the life insurance payout from estate taxes and help ensure that your loved ones don’t incur any unexpected costs.
Transferring the responsibility of the estate
For large estates, an irrevocable life insurance trust can limit the tax burden for heirs and give you control over how the proceeds of your policy are spent and who will inherit them. It can also provide much-needed cash if your estate primarily consists of hard-to-sell assets, like real estate.
A life insurance trust can provide the ability to transfer ownership of a life insurance policy, so you no longer own it directly. That way, the proceeds will not be added to your estate, thus lessening the estate tax burden for your heirs.
Here's a reminder of how it works:
An irrevocable trust names someone else as the trustee. This reduces your control over the policy, but not before deciding a few key things, such as who the beneficiary will be, how premiums will be paid and how benefits will ultimately be distributed.
If you have specific ideas about how the proceeds of the policy should be used, you can provide specific instructions. These plans can cover everything from care for a spouse’s future to planning for children’s or grandchildren’s education, or even supporting a meaningful cause or charity.
For the trust to be valid, it must meet these three conditions:
- It must be irrevocable.
- You cannot be the trustee.
- It must be opened at least three years prior to your death.
Who pays the premium?
Because you, as the grantor, will no longer own the life insurance policy, the trustee must pay the premiums. You can transfer money from your estate into the trust on a regular basis, as long as you stay below the $15,000 annual gift tax limit per beneficiary.1
Together, spouses can give each beneficiary $30,000 without having to pay a gift tax.
The trustee can then use that money to make premium payments.
Life insurance trusts are also helpful in giving your heirs access to money right away, as benefits are typically paid out within a month. But it may take a year or longer to unload non-liquid assets in an estate, such as real estate. That could burden your heirs with estate taxes, which are typically owed nine months following a death.3
By using a life insurance trust, heirs have access to cash to pay for final expenses, taxes and any debts while they’re waiting for the estate to settle.
With a life insurance trust, you may be able to create a plan that cares for your loved ones long after you’ve passed. However, it is important to note that with such a high personal exemption on federal estate taxes, most people can care for those they love without one.
What legacy do you plan to leave for your loved ones? Ask your financial advisor how your life insurance policy from Lincoln can benefit when put into a trust.