What Is an Irrevocable Life Insurance Trust? Do I Really Need One?

Plenty of estate planning guidance relies on avoiding taxes, and while this is a worthwhile goal, life insurance can be an important part of your estate planning options. One of the most popular tools to handle this is known as an irrevocable life insurance trust.

When you select a trust to hold the title to your life insurance policy, you can avoid having the death benefits with that policy included in your estate. This could save your beneficiaries hundreds of thousands of dollars up to millions of dollars in taxes. It’s important, however, to consult with an estate planning attorney who has experience putting together irrevocable life insurance trusts.

This is a trust where the primary purpose is to hold the life insurance policy and any of the cash needed to pay the policy’s premiums. In order to set up an irrevocable life insurance trust you would need to initially fund the trust with money to cover premiums and then the trust would be the owner of the life insurance policy while you as the individual are named as the insured.

It must be structured in a way to avoid giving you what is called incidence of ownership. For example, if you have the right to change how proceeds are distributed out of the trust, if you have the option to borrow against the policy or change beneficiaries then you would be classified as having incidence of ownership in the policy. This could mean that the death benefit could be included in your estate and subject to estate taxes.

Since one of the primary goals for using an irrevocable life insurance trust is to ensure that you are protected from taxes, and having this policy included in your overall estate, you should always work with an experienced estate planning attorney to protect these rights now and well into the future.

Contact a New Jersey estate planning attorney today to learn more about your options.