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What is a Life Insurance Trust?
A life insurance trust is designed to keep the proceeds of a life insurance
policy out of your estate and give your esate the liquidity it needs.
Generally, you can fund a life insurance trust either by transferring an
existing policy or by having the trust purchase a new policy. (Transferring
an existing policy may have gift tax consequences. A tax advisor can offer
more information on this.)
To avoid inclusion in your estate, such trusts must be irrevocable -- meaning
that you cannot dissolve the trust or change its terms if you change your
mind later. With proper planning, the proceeds from life insurance held
by the trust may pass to the beneficiaries without income or estate taxes.
This gives them cash which may be used to help pay estate taxes or other
expenses, such as debts or funeral costs.
You might want to consult an attorney, or perhaps a CPA or tax advisor for
additional guidance on a life insurance trust.
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