Most of the time, you are the owner of your life insurance as the person covered under the policy. When you die, the proceeds of the life insurance are subject to estate taxes. If you set up a trust for the policy, proceeds are not subject to taxation. While you do give up other rights when you set up a life insurance trust, you can designate how and when the proceeds of your insurance are to be distributed.
Fill out the paperwork designed to set up the trust. Check with your state's Secretary of State to find out if your state requires that you file a copy of the trust document. The initial paperwork requires you to name a trustee and beneficiaries.
Name a trustee for the trust. You may choose anyone to serve in this capacity. You can choose a friend or relative, but you should talk to the person first to make sure she is willing to take on the responsibility. Additionally, you should make alternative plans if she dies before you do.
Sign the trust agreement and retain the signature of your appointed trustee. Your trustee should be trustworthy and agree to follow the terms of your trust. They will be in charge of your assets once you die and must be able to fairly distribute your assets as you intended. The trustee may accept payment for the services.
Choose an institutional trustee, such as a bank, family attorney or financial institution, to make sure your funds are handled appropriately and to avoid potential disputes within your family. In many cases, an insurance company will serve as the trustee at no extra charge because there are no ongoing investment decisions or other duties that accompany the position. Check with your insurance company to see if they offer this service.
Transfer the assets to the trust that you wish to be included in the fund. Visit your insurance agent who manages your life insurance policy to change the beneficiary on the policy. The beneficiary will be the actual trust.
Set up the trust early enough to reduce the risk of your passing within three years of the transfer. According to attorney Dianne Reis, the life insurance trust does not take affect until three years after you set it up.
Once you set up a life insurance trust, you lose certain rights. You cannot borrow against the policy and you cannot change beneficiaries, even if there is a change in your family status. Additionally, any premium payments you make will be charged as gifts to the estate and may use up your gift limitations.
- MetLife: Establishing a Trust Fund
- North Carolina Bar Association; Planning Your Estate -- Trusts; Carol A. Schwab; July 2000
- Fidelity Investments. "What Is a Trust?" Accessed March 6, 2020.
- American Bar Association. "Revocable Trusts." Accessed March 6, 2020.
- HG.org Legal Resources. "When to Consider an Institutional Trustee." Accessed March 7, 2020.
- AARP. "Choose the Right Executor or Trustee." Accessed March 6, 2020.
- American Bar Association. "Choosing the Executor or Trustee." Pages 10-11. Accessed March 6, 2020.
Linda Ray is an award-winning journalist with more than 20 years reporting experience. She's covered business for newspapers and magazines, including the "Greenville News," "Success Magazine" and "American City Business Journals." Ray holds a journalism degree and teaches writing, career development and an FDIC course called "Money Smart."