California residents preparing to start their estate plans might hear a lot about the best way to avoid probate. One of the most popular ways to avoid probate is an irrevocable life insurance trust.
An irrevocable life insurance trust is funded with at least one life insurance policy, but more can be added. Irrevocable trusts cannot be changed or revoked, making them a secure form of estate planning.
Why should you consider an irrevocable life insurance trust?
The primary purpose of creating an irrevocable life insurance trust is to avoid estate tax and probate. Generally, this trust won’t be taxed with other assets after your death.
People who create an irrevocable life insurance trust can decide what happens to the money after their death. There are set instructions for how the money should be used and who is the primary beneficiary of that trust.
Since these trusts are set up with life insurance money, it can be used to provide cushioning for your surviving family members. This money can be used to handle things like estate taxes on other assets or property as well as expenses for the funeral and other things that might come up.
What happens during a divorce?
Irrevocable life insurance trusts are protected in the instance of a divorce. If you set up your irrevocable life insurance trust with your children as the beneficiaries, it’s not considered an asset that can be paid out or split up between you and a former spouse.
Irrevocable life insurance trusts can also be used to manage money for a person with special needs who would otherwise not be able to handle the money themselves. The trust can be used as a safety net for your beneficiaries as well.
What are the cons of setting up an irrevocable life insurance trust?
Even though you’re placing life insurance policy funds into the trust, you’ll need money up front for the trust. This can be a downside for some families.
There are a lot more reasons to set up an irrevocable life insurance trust. Make sure you consider all of your options before starting a trust.