By: Jeremy Skoglund, VP Trust Officer

Many of us know what a life insurance policy is for. We use them as a way to help our loved ones when we are gone. But why would we place a life insurance policy in a trust? And why would we make that trust irrevocable where we can’t make any changes to it? Well, it all has to do with estate taxes. When you take out an insurance policy, even though the proceeds will go to someone else, you are the owner of the policy. Generally, all the property you own will be subject to federal estate tax at your death and possibly state estate tax, depending on your state’s laws. To avoid the estate taxes associated with your insurance policy, you can set up an Irrevocable Life Insurance Trust (ILIT). How does it work?

  1. Setup the Trust – We recommend having an attorney help you draft the Trust document because proper drafting is essential.
  2. Name Beneficiaries of the Trust – These will be the beneficiaries you would have named on your Insurance Policy.
  3. Name a Trustee of the Trust – This is who will manage the assets of the Trust. See our Trust Tuesday on using a Trust Department as a Trustee.
  4. Transfer the Life Insurance Policy to the Trust – You will do this by naming the Trust as the owner and beneficiary of the policy.

The Trust is now the owner of the policy. This process has essentially shielded the insurance proceeds from estate taxes. The reason that the Federal Government allows you to do this has to do with the Irrevocable part of the Trust. Once the Trust is in place, you cannot make any changes to it, because you are not the owner. If you would like more information on how an ILIT works or whether it would be beneficial to you, please give us a call at 701.857.7150.