If you are a Texan unfamiliar with estate planning, you may not be familiar with the term “irrevocable life insurance trust.” According to FindLaw, an irrevocable life insurance trust is a life insurance policy managed by a designated trustee who distributes benefits to your heirs after your death according to the terms that you specify when creating the trust. Once you have successfully created an irrevocable trust, you can no longer change it, nor can your trustee or anyone else.
Due to the unchangeable nature of an irrevocable life insurance trust, you must take care with its creation. However, it has advantages over a traditional life insurance policy under certain circumstances, particularly if your beneficiaries also receive government aid or if your estate may be subject to a death tax, also known as an estate tax liability.
Government aid programs, such as Medicaid, base eligibility partly on income. Therefore, your beneficiary may lose access to government aid on receiving proceeds from your life insurance policy. When creating your irrevocable life insurance trust, you can stipulate that the benefits can only apply to expenses not covered by the beneficiary’s government aid and should not pay out in a lump sum.
An irrevocable life insurance trust owns the policy for you. Since the policy is not in your name, it is not included in your estate and therefore cannot factor into calculations of your estate tax liability. Not only does this reduce the amount of taxes your heirs will have to pay, you may also find that you do not need to purchase as much coverage as you anticipated as a result of your tax liability being smaller.
An irrevocable life insurance trust is not for everyone, but in certain situations it can help to solve potential estate planning problems.
The information in this article is not intended as legal advice but provided for educational purposes only.