What is an Irrevocable Life Insurance Trust?

This type of trust is used to deal with the Estate Tax in many estate plans. The death benefit is not included in your estate. That way the insurance company pays the estate tax because the death benefit isn’t taxable. Life insurance can also be a very valuable asset. Cash value can get pretty significant. In Minnesota, only a little over $9,000 is protected from creditors. Once it is inside this trust, it is protected from creditors.

Essentially, the trust itself either buys a life insurance policy or you give the policy to the trust.  This way, the policy isn’t a part of your estate. It is also outside of probate.  You give money to the trust and the trustee pays the premiums.

When you die, the death benefit is usually paid to the trust. The trust then protects your family and heirs. It provides money to pay estate taxes, provide liquidity to the estate, and sometimes pay debts. The trust protects the money from being taken by your creditors after death.

It also prevents the creditors of your heirs from taking the money. In Minnesota, a spouse can protect $46,000 of life insurance proceeds from creditors. Other heirs can’t protect any of the money outside of the trust. This way, you make sure that the money goes to benefit your loved ones and no one else.

The ability to own life insurance is a trust feature. Many of your other trusts can own life insurance. However, many people choose to make a separate trust just to hold life insurance.

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