Taking out a life insurance policy is a great way to ensure that, should anything happen to you, those you love will be both provided for and not burdened by your final expenses. However, life insurance policies that aren't placed in a trust are usually subject to the estate tax, which can deprive your loved ones of thousands of dollars. The best way to avoid this problem is by placing your life insurance in a trust so it is not subject to estate taxes.
The Process
Step 1
Determine who the beneficiaries of your trust will be. As the beneficiaries will be receiving benefits directly from the trust, they should be carefully chosen. Weigh each prospect's trustworthiness and financial responsibility when making this decision.
Step 2
Determine the benefits you would like your beneficiary to receive, how they will receive these benefits and over what time period they will receive them. Use these figures to calculate how much money the trust must contain.
Step 3
Find a trustee to manage your life insurance trust. Examples of a good trustee are a financial adviser, bank or trusted and financially savvy associate. Some trustees may be willing to manage your trust for free, but in the case of an institution such as a bank, you will have to allocate additional funds to pay for its services.
Step 4
Contact and hire an estate-planning attorney to guide you through the process of setting up your trust as a legal entity. By enlisting the services of an attorney, you ensure that the trust is set up correctly and will function as intended in the case of your death.
Tips and Warnings
- Once a life insurance trust has been set up it cannot be altered, and the life insurance policy placed in the trust cannot be borrowed against or retrieved. Remember that premiums must still be paid on an insurance policy that is placed in a trust. This is a responsibility of the trustee with whom an arrangement must be reached on the means of payment.
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