What is a life insurance trust
A life insurance trust is designed to keep the proceeds of a life insurance policy out of your estate and give your estate the liquidity it needs.
Generally, you can fund a life insurance trust either by transferring an existing policy or by having the trust purchase a new policy. (Transferring an existing policy may have gift tax consequences. A tax advisor can offer more information on this.)
To avoid inclusion in your estate, such trusts must be irrevocable -- meaning that you cannot dissolve the trust or change its terms if you change your mind later. With proper planning, the proceeds from life insurance held by the trust may pass to the beneficiaries without income or estate taxes. This gives them cash which may be used to help pay estate taxes or other expenses, such as debts or funeral costs.
You might want to consult an attorney, or perhaps a CPA or tax advisor for additional guidance.
The answer on this page was edited based on source material from the Federal Consumer Information Center. These pages are no longer being updated. --Webmaster
