Nothing is as comforting as knowing that your loved ones will be financially protected if you died. But without proper planning, there’s no guarantee of this. You’ve probably seen or heard of tax challenges and other conflicts arising when it’s time to execute a deceased person’s will. This mostly happens with life insurance policies. If the policy is not well packaged, your beneficiaries may lose most of it to tax.

One way to ensure this doesn’t happen is by writing your life insurance in tax. This set up comes with a plethora of benefits and ensures your beneficiaries get as much as possible from the payout. But what is life insurance in trust? How does it work, and is it the best option for you? We seek to give you answers to these and more questions in this comprehensive guide. Let’s jump right in.

What is a Trust?

A trust is a straightforward legal arrangement that allows you to leave assets to anyone you choose. It can be your family, friends, or anyone else you’d like to leave something. In most cases, trusts are managed by legal professions. However, it’s possible to select one or more trustees. The people you choose don’t have to be legal professionals. It can be friends or family members. 

However, it’s advisable to have a legal professional as part of your trustees. Your trustees will be responsible for managing the trust until it’s matured – either as you specified in your will or upon your death.

You can have your life insurance policy in trust. This is commonly referred to as a writing life insurance in trust. This kind of setup’s primary advantage is that your trust won’t be considered part of your estate. As a result, your beneficiaries stand to reap plenty of benefits during payout.

How Do I Leave Life Insurance in a Trust?

The insurance trust will have ownership of your life insurance policy. The trust will hold the life insurance policy naming you as the insured until you die. When you die, the insurance benefits will be paid to the trust. At this point, your trustee will be responsible for collecting the funds and paying off any taxes payable and expenses.

Once all taxes and expenses have been remitted, the trustee will then distribute the assets based on the instructions you left. However, to ensure your beneficiaries benefit from the setup as much as possible, it’s crucial to pick the right trust. You have several options. These include:

  • Discretionary Trust: This type of trust allows you to leave detailed instructions of how you’d like your assets to be distributed and to which beneficiaries. You can leave a letter detailing all your beneficiaries and how much they get. The benefit of this is that you’re certain your trustees know how to distribute the assets when you’re gone.
  • Absolute Trust: In this trust, you name all your beneficiaries at the beginning, and you can’t change them in the future. You can include all future children and spouses as your beneficiaries. The benefit of this trust is that it’s easier to process without legal delays since the beneficiaries are clear. Besides, the inherited tax on this type of trust is often nil or negligible in most cases.
  • Survivor’s Discretionary Trust: This is a joint life insurance policy in trust. It says that if you or your partner dies, the surviving joint owner inherits the assets before all other beneficiaries. However, if the survivor dies after 30 days, the beneficiaries inherit based on the discretionary trust.

Which Life Insurance in Trust Option is the Best?

Ultimately, the choice is up to you and what your circumstances are. However, it’s always best to seek legal counsel before you make up your mind. A lawyer will help you understand the different options and which one is most suitable for you based on your circumstances.

You should also know that the success of your trust solely depends on your commitment to paying premiums. You should also ensure the trustee has a trust deed in hand. Without one, they won’t be able to claim the funds when you die.

Advantages of a Life Insurance in Trust Policy

So, what do you stand to gain when you set up your life insurance in trust? There are many reasons why individuals choose to have their life insurance in trust. Some of the top reasons include:

There’s Better Control of Assets

The last thing you need is for all your money to go into paying outstanding debts and all forms of taxes. You want your family to be comfortable and access your money with ease. This is made possible through a life insurance in trust set up. Because this trust isn’t considered part of your estate, you can rest assured your assets will be distributed among your beneficiaries without major deductions.

Beneficiaries Have Faster Access to the Funds

Accessing a deceased person’s money without a trust can be a lot like pulling teeth. The legal proceedings take too long, and in most cases, the beneficiaries only get a small fraction of your entire estate. It’s different with a life insurance in trust. 

With this kind of setup, your beneficiaries won’t need to obtain probate. All they need is to issue a death certificate, and the money will be accessible within weeks.

Protection from Inheritance Tax

Without a trust, most of your assets may go into paying expenses and owed taxes. Most trusts are exempted from inheritance tax because they’re not considered part of your estate. However, this varies from one person to another.

For instance, you may be liable to inheritance tax every 10 years. If this is the case, the beneficiary will have to handle the expenses when they’re due. This may be worth mentioning to your trustees to ensure everything goes smoothly even after the inheritance. 

Does a Life Insurance in Trust Expire?

Ideally, a trust can last for up to 125 years, and there’s no expiry for charitable trusts. However, how long it lasts will depend on you and how you see it fit. For instance, you can stipulate that the trust will last until your children are 25 years of age or married with children. Again, consider your circumstances and think about which arrangement would benefit your beneficiaries the most.

Are There Additional Costs Incurred?

You may be wondering if you’ll need to spend extra money to have your life insurance policy in trust. The answer is no. Most insurance companies don’t charge extra to set up life insurances in trust. In fact, some recommend them to their clients. However, don’t make the decision blindly. If you’re thinking of setting up your life insurance in trust, bring in a lawyer to ensure you’re getting what you seek.

Final Thoughts

The best thing you can do for your family or friends is to leave them some security after you’re gone if you can. In most cases, estates are lost in tax payments and covering expenses, and people who should have benefited are left with nothing. Don’t let this be your story.

Select the right life insurance in trust arrangement and ensure your beneficiaries are covered. Don’t forget to work with a legal professional when setting up your trust. It may also be a good idea to have them as a trustee because they’ll know what to do when the time comes. Above all, ensure you keep up with your premiums. If you don’t, there won’t be anything to benefit from.