Establishing a life insurance trust protects inherited property against estate taxes and bypasses the probate process. Succession is a legal requirement to validate the wills of the deceased, settle outstanding debts and bequeath inherited assets to the heirs.

A life insurance trust can be thought of as a safe deposit box for inherited assets. Policies are placed within the trust and managed by a Trustee. Upon the policyholder’s death, the Trustee distributes proceeds to designated beneficiaries.

Policyholders are prohibited from acting as Trustee. Most people help their spouse or adult children manage their estate. Some people prefer to use the services of a neutral third party, such as estate planning attorneys or insurance trust companies. Policyholders retain control over beneficiary designation and distribution terms. Trustees cannot access the account until the policyholder dies.

As with most things in life, life insurance trusts offer advantages and disadvantages. The main advantages include avoiding the probate process and exemption from estate taxes. The main disadvantage is that once trusts are established, they become irrevocable and cannot be changed.

Considerable consideration should be given to the appointment of a Trustee. It is best to discuss the position with the intended Trustee to determine if you are comfortable with estate management duties. Other considerations include who receives the insurance proceeds and how the funds should be distributed.

Insurance proceeds can be distributed in whole or in part. The distribution can be a single payment or installments. Policyholders can choose to distribute payments monthly, quarterly, semi-annually or annually. Lump sum payments can be provided to beneficiaries when certain milestones are reached, such as graduating from college, starting a business, or getting married.

Policyholders who bequeath money to recipients receiving government assistance can set distribution schedules so as not to interfere with their ability to receive government assistance.

Irrevocable life insurance trusts allow policyholders to donate up to $10,000 per year, per individual beneficiary, tax-free. Gifting up to $20,000 is allowed for married couples. Monetary gifts may be given to as many recipients as the policy can accommodate.

Annual life insurance proceeds are considered a gift to beneficiaries by the Internal Revenue Service. No gift tax is due when earnings meet gift limits. Heirs should consult with a tax attorney to ensure they comply with IRS decisions.

An important aspect of life insurance trusts is the Crummey Charter. Clifford Crummey’s name; a man who became famous for his court case involving irrevocable life insurance trusts.

Insurance companies must send the Crummey Letter to beneficiaries when policyholders deposit annual premiums. Beneficiaries have a specific amount of time to withdraw the proceeds or the money is used to finance insurance premiums. The issuance of the Crummey Charter ensures that annual premiums remain tax-free.

Although life insurance trusts are complex, they offer substantial flexibility during the establishment phase. Each trust is as unique as the person who establishes it. Life insurance trusts are a secure way to protect inherited assets and provide for loved ones for years to come.