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The pros and cons of life insurance trusts

On Behalf of | Feb 22, 2023 | Estate Planning |

Some grantors create stand-alone trusts or put them into a will. Others, however, put their life insurance into a trust — aka a life insurance trust. (It’s sometimes called an irrevocable life insurance trust.)

Putting your life insurance policy into a trust has many advantages. But it also comes with its risks. Let’s examine the upsides and downsides of insurance trusts.

Pros of life insurance trusts

Life insurance trusts provide the following benefits:

-Estate tax savings: Establishing a life insurance trust could help reduce or eliminate estate taxation. How does it work? By placing a life insurance policy into a trust, you relinquish ownership of the policy, which means that the life insurance proceeds have no connection to your taxable estate.

-Government benefit protection: If your beneficiary receives government benefits like Medicaid or Social Security, creating a life insurance trust allows them to maintain eligibility for the payment they’re entitled to.

-Distribution control: Your appointed trustee can distribute the proceeds of your insurance policy according to your wishes. For instance, you can request said trustee to allocate funds to minor children, a charity or a distant relative.

Cons of life insurance trusts

There are some drawbacks to life insurance trusts, too.

-Establishing a life insurance trust costs a lot of money: Should you decide to create a life insurance trust, expect to spend a few thousand dollars to get started.

-You typically can’t make changes to it: Barring some exceptions, once you set up a life insurance trust, you can’t edit it. Therefore, you need to give it some thought before creating one.

It’s ideal to weigh the ups and downs of a life insurance trust, especially since it’s complicated to establish alone. Consider seeking legal assistance to aid you in the process.


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