Should I Put My Life Insurance Policies In My Living Trust?

As you begin the estate planning process, you will find there are several different instruments you can use. Each person has different goals and needs; therefore, not every person will choose the same instruments for his or her estate plan. Some people choose a “traditional” estate plan based on a will; however, Revocable Living Trusts are becoming more popular as the base for estate plans because this type of trust has several advantages that a will does not offer.

What Is a Revocable Living Trust?

A Revocable Living Trust is used to hold assets while you are living. You choose the assets to transfer to the trust and you choose how those assets will be used for your benefit during your lifetime. You can name a trustee to manage the trust; however, most people choose to name themselves as the trustee.

At the time of your death, the assets in the trust will be distributed to the beneficiaries named in the trust or the assets can be held in another trust for the benefit of the beneficiaries. It is up to you to determine how you want the assets to be administered upon your death.

What Are the Benefits of a Revocable Living Trust?

Many people have chosen living trusts as a main element of their estate plan because Revocable Living Trusts offer several advantages.

➢ Avoid Probate

In order to fund the trust, you must transfer some or all of your assets to the trust. The trust then “owns” the assets and manages those assets for your benefit. At the time of your death, your trust remains the “owner” of the assets; therefore, those assets are not required to be included in your probate estate. If you transferred all of your assets to the trust prior to your death, you may be able to avoid probate altogether.

➢ Protects Privacy

A will must be probated in order to transfer your property to your heirs. A probate proceeding is a matter of public record meaning anyone can access the documents filed in your probate estate. A Revocable Living Trust is not a matter of public record; therefore, the distributions from the trust remain a private family matter.

➢ Protects Assets If You Become Incapacitated

A will does not take effect until your death; therefore, if you become mentally or physically incapacitated prior to your death, your will does not dictate how your assets should be managed. However, a Revocable Living Trust contains instructions for the management of your property in the event you become incapacitated.

Funding a Revocable Living Trust

“Funding” your trust simply means transferring assets from yourself to the trust. To transfer assets with titles (i.e. real estate, vehicles, boats, etc.), you must sign the title over to the trust thereby replacing your name on the title with the name of the trust. The types of assets you place in your trust are solely in your discretion; however, since one of the benefits of the trust is to avoid probate, most people transfer all of their major assets that would be subject to probate to the trust.

What About Life Insurance Policies?

Life insurance policies are handled slightly differently if you want those assets to be used to fund your Revocable Living Trust. Life insurance does not become an “asset” until your death unless it is a whole life policy that accumulates cash value. The decision to transfer ownership of your life insurance policies to your trust depends largely on the size of your probate estate.

The proceeds from life insurance policies that you can borrow against are included when calculating the net taxable value of your probate estate. If the taxable value of your probate estate will exceed the exempt amount, you will owe Federal estate taxes. In that case, you may want to discuss an irrevocable life insurance trust with your estate planning attorney. There are limits and disadvantages to using this type of trust; therefore, you must carefully consider your options before making a decision.

On the other hand, if you are transferring all of your assets into the Revocable Living Trust and you will avoid probate or your probate estate will not be large enough to incur Federal estate taxes, you may want to consider funding your trust with your life insurance policies. If you transfer ownership of the policies to the trust and name the trust as the beneficiary of the polices, you will have the most control over how those assets are managed within the trust. Upon your death, the life insurance proceeds will be paid to your Revocable Living Trust to be distributed or managed according to the terms in your trust agreement.

A Comprehensive Estate Plan

If you choose to create a Revocable Living Trust, you still need a will. Using a Revocable Living Trust as part of your estate plan does not replace other estate planning instruments. Talk to your attorney to determine the documents you need for a comprehensive estate plan.