What is a Washington DC Life Insurance Trust?
In general, a trust is a financial entity you create in order to put money or assets aside to be managed, distributed, or invested by the person or entity overseeing the trust, known as the trustee. Individual or asset management companies can be a trustee. A life insurance trust is a trust that allows the trustee to purchase life insurance policies on the grantor, which is the person who established the trust in the first place, or the grantor’s spouse or beneficiaries of the trust.
The trust will be the one who owns the applicable life insurance policies and will also be responsible for collecting the benefits when the insured policyholder passes away. The trustee’s job is to then distribute death benefits to those listed as beneficiaries according to the trust’s terms. It’s required that the trust list who the beneficiaries are, how and when they will receive trust distributions, as well as what investment options are allowed.
Revocable vs. Irrevocable Trusts
There are two types of life insurance trusts — revocable or irrevocable. When a trust is revocable, it means changes are allowed. As its name suggests, an irrevocable trust is one that cannot be revoked or amended or altered in any way. Choosing between revocable and irrevocable trusts will depend on the individual person’s situation and estate planning goals. Speaking with a knowledgeable Washington DC estate planning attorney can help you decide which type of life insurance trust is best for your particular situation.
Why Start a Life Insurance Trust?
You might be wondering what the benefits are for starting a life insurance trust, since they typically don’t offer any advantages over a personally-held policy. However, there are several scenarios where a life insurance trust might be a wise idea. These include:
- Estate Taxes: While tax exemption thresholds have been raised, some estates are still subject to a 40% tax rate. Death benefits transferred to an insured’s estate after he or she passes away could be subject to estate taxes. However, if a policy is in a trust and owned by a trustee, then there is no estate tax since the decedent didn’t own the policy.
- Better Control Over Death Benefit Distribution: With a normal life insurance policy held by an individual, the death benefit would be transferred directly to the beneficiary by the company once the policyholder passes away. By putting it in a trust, you have to exercise better discretion on how death benefits are distributed.
This can be helpful when you have younger children or adults who are not necessarily financially responsible. Giving someone the full death benefit could be a mistake if they cannot manage their own finances. Because the trustee controls the benefit, it’s also protected against action by the beneficiary’s creditors.
Contact a Washington DC Estate Planning Attorney
If you are wondering whether a life insurance trust, or other types of trusts, are right for your estate planning needs, contact the Washington DC estate planning attorneys at Tobin, O’Connor & Ewing today to schedule an initial consultation. Let our skilled District of Columbia attorneys help with all your estate planning needs.