What is a Life Insurance Trust? [Explained]

Are you looking for ways to manage a life insurance policy? A life insurance trust might be the right choice for you. A trust, in contrast to a will, is a structured, private way to manage your accounts and property when you're gone. What is a life insurance trust, specifically, though? It's a trust that manages the death benefits of one or more life insurance policies.

In this article, we’ll shed some light on exactly what that means, so you can more easily decide whether a trust is right for you and your loved ones.

What Is A Life Insurance Trust?

A life insurance trust is a type of trust that can be both the owner and beneficiary of one or more life insurance policies. Sounds a little weird, right? Well, by relinquishing control of the life insurance policy’s death benefit to a trust, you are giving up finer control over the policy while you are alive for sheltering it from estate taxes once you are gone. This is mostly relevant for people with a very high net worth -- exceeding $12 million.

What Is A Life Insurance Trust: Irrevocable vs Revocable

As you’re researching life insurance trusts, you’re mostly going to find information about irrevocable life insurance trusts, but what about revocable life insurance trusts? Let’s start by defining each by their most basic differences:

• An irrevocable life insurance trust (ILIT) is a trust that cannot easily be modified once it’s been created. All beneficiaries must consent to any requested changes before they can be finalized.

• A revocable trust, also called a living trust, is much more flexible. It can be modified by its owner at any time after it’s created. They are able to add and remove beneficiaries and change the terms of how assets are used.

More flexibility sounds like the better option, right? Well, for many, it is! The other main difference between these two types of life insurance trusts is that irrevocable life insurance trusts are sheltered from estate taxes, while revocable trusts are not. That said, for 2025, estate tax only applies if the worth of the estate is $13,990,000 or more.

In recent years, less than 0.2% of deaths in the US have had to pay estate tax. For those with considerable wealth, however, an irrevocable life insurance trust may be the better option -- a way to shelter what you leave behind from that 40% tax rate.

Is A Life Insurance Trust Right For Me?

When deciding whether or not to establish a life insurance trust, there are a few important things to consider:

• An ILIT will help you to reduce the estate tax if your net worth exceeds the current cut-off amount. It can be very beneficial for individuals who meet this benchmark.

• A will is generally cheaper to establish than a trust. You can set up a will online for as little as $160, and even when done with a lawyer, the price jump isn’t that much. Trusts, on the other hand, start at $300 for an online trust and can go into the thousands, depending on how complex they are.

• If your net worth is high enough that your estate would be taxed when you die, a will is likely going to be more expensive to execute than a trust largely due to the probate process.

• A trust avoids probate entirely. Probate is a major deciding factor for many in whether they choose a will or trust. If you would prefer privacy or would like to ensure that your loved ones are not dealing with settling your estate for a long time, a trust may be the better option.

• Probate is the process by which a will is settled. During probate, the will must be determined valid. Debts are then settled, and the remaining property is given to the beneficiaries.

• It can take a very long time, and may grow to be very expensive. Once it’s settled, though, no more creditor claims can be made on your estate.

• Probate is all public record. Anyone can look up the contents of your will, see who was a beneficiary, and what they got.

If you’re sure you want a trust but aren’t sure whether to go with irrevocable or revocable, consider the following:

• If you have considerable wealth in your estate (more than $13,990,000), an irrevocable life insurance trust will protect that amount from the 40% estate tax.

• If you have less than $13,990,000 in your estate, your estate will not be taxed. The major benefit of an irrevocable life insurance trust wouldn’t apply to you.

• Because you are entirely forfeiting that amount of wealth to the trust, using an irrevocable trust can help you to qualify for Medicare.

• If you do have an estate valued at $13,990,000 or more, consider just how much more. If the amount that must be reached before estate tax applies continues to increase, you could find yourself in a situation where the amount you placed in the trust would no longer be taxed. With an irrevocable trust, you would not be able to retrieve the amount or change the trust.

How To Establish A Life Insurance Trust

There are many affordable options to establish a trust online, but the best way to get a trust started is by contacting an estate or financial planning lawyer. Because the rules around the estate tax change frequently, an expert can help ensure that you are meeting your needs and that the many requirements for properly setting up a life insurance trust are met.

Wrapping Up

Overall, establishing a life insurance policy as a trust can be more beneficial for you and your loved ones than simply allowing it to pay out or be settled by a will. For a little bit of extra work now, you can ensure those you leave behind will have an easier time. What it comes down to is whether you go with a revocable or irrevocable trust, and that’s where the experts can help.