If you have a life insurance policy, there are three different ways that you can bestow your policy upon your family. You can directly designate a beneficiary as the recipient, assign your Revocable Living Trust as beneficiary, or name your Irrevocable Life Insurance Trust (ILIT) as heir.

Protect Your Funds

If you want to protect your Life Insurance funds for the benefit of your family members, only one option allows for asset protection. A Family Access Trust, Family Sentry Trust, or Irrevocable Life Insurance Trust is the best way to protect your loved ones from having the funds taken to pay for a lawsuit to which they are a party. If you leave funds directly to a beneficiary or if you use a Living Trust, neither option protects funds from creditors.

Lighten the Tax Burden

If you wish to relieve your family of some of the estate tax burden, you may want to have your Irrevocable Life Insurance Trust (ILIT) own your life insurance policy, and name your Irrevocable Life Insurance Trust as beneficiary, since doing so will remove the policy from your name and therefore from your taxable estate. Once your policy belongs to an Irrevocable Trust the funds can pass to your family member’s without the need for estate taxes. You can also lighten the tax burden from your spouse’s estate. Otherwise, when it passes from your spouse to your children, it may be subject to estate tax, but if retained by the ILIT, it will not be taxed.

Provide for Your Family

All three methods of life insurance inheritance allow you to leave funds to help your family. If, however, you choose to directly bequeath funds, there is a chance that your chosen beneficiary could squander the inheritance. With a trust, the funds could be slowly dispersed over time to keep this from happening.

Help Future Generations

You can also use a Trust to provide for future generations. Within your trust you can create a generation skipping or dynasty trust. Both options allow you to leave money to your descendants.

Tags: Wills and Trusts