Generally a person purchases a single premium life insurance policy with the trust as the irrevocable beneficiary. Irrevocable means that the beneficiary cannot be changed. The Trust is usually also the owner of the policy preventing the insured from having access to the cash value. This is an excellent way to prepay a funeral without having to commit to a specific funeral home. These types of trusts are used to help protect assets from Medicaid. This type of trust is a funeral trust. There are other types of irrevocable trusts as well. A good agent familiar with care resource planning can help answer more of your questions and provide guidance on asset conservation in the later years of life when preservation of assets becomes more important than accumulation of assets.
Ideally the grantor creates an irrevocable life insurance trust (ILIT) for the benefit of their targeted beneficiaries. The ILIT must be dated before the life insurance policy date of issuance as well. The ILIT must own the life insurance policy day one. To comply with the law most ILITs use annual “Crummy” letter notification and sometimes may include hanging powers. Before moving forward with the ownership arrangement of an ILIT consult your legal adviser.
An Irrevocable Life Insurance Trust (ILIT) is the owner and beneficiary of the life insurance policy. As such, the person who took out the policy does not have any incidences of ownership in the policy, and the policy will not go into his/her estate upon death. If done early enough, this can avoid estate taxes paid on the proceeds of the life insurance.
However, the trust is irrevocable and the person taking out the policy is no longer the decision maker for the policy, once the trust owns it. So you must use caution and wisdom in setting up an Irrevocable Life Insurance Trust.
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However, the trust is irrevocable and the person taking out the policy is no longer the decision maker for the policy, once the trust owns it. So you must use caution and wisdom in setting up an Irrevocable Life Insurance Trust.