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Wills and estate planning

The benefits of life insurance trust(s) in estate planning

Life insurance trusts are often created to reduce the size of a taxable estate. This helps ensure your heirs receive the cash rather than it being spent to pay estate taxes.

Most people who establish life insurance trusts do so because they are concerned that the combination of both their estate's assets and their type of life insurance benefits will generate a substantial increase in their estate taxes when they die. So instead of their heirs pocketing the cash, they're fearful that estate taxes could consume the majority of the inheritance money.

If you have a large estate, as well as a substantial life insurance policy, you may be wondering how much life insurance you need and what to consider when making sure that the benefits of your policy don't pay out into your taxable estate - increasing the amount of taxable income. One way to do that is with an irrevocable life insurance trust.

If you own a life insurance policy on your own life and are worried about estate taxes, you may be able to reduce the size of your taxable estate by creating an irrevocable living trust and naming someone else as the trustee. Once established, you can transfer your life insurance policy into the trust, making the trust the new owner of the policy. Doing this means you'll no longer have control over the policy, but through the terms of the trust, you can determine who will have control, how premiums are paid, who will benefit from the trust, and how payments should be made to the beneficiary(s). It's important to note that the trust must be in place for at least three years and the trust must be irrevocable.

To set up a life insurance trust, it's in your best interest to consult an estate planning attorney who is knowledgeable about your state's laws, and can better advise you of your options.



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