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Irrevocable trust and life insurance

Recently the ampminsure community had a discussion where a member posed a problem before the community member regarding a life insurance policy held in an irrevocable trust. Following is the post made by her.

I am the beneficiary of a life insurance policy. My step mother put the policy into an irrevocable trust. She is mad at me and told her son not to give me the money from the policy after her death. She can’t remove me as a beneficiary, can she legally not give me the money? My share is 1 million dollars.
No doubts members have come forward to her rescue and tried to clear her doubts as much as possible.

The above discussion has made me interested in delving more into the subject of irrevocable trust and life insurance. Now, in this article I’d try to compile my findings regarding irrevocable trust.

Why should I create an irrevocable trust?

The purpose of irrevocable trust is to keep the life insurance benefits outside the estate to avoid paying estate taxes on the death benefit. The life insurance benefits paid to the beneficiaries may not attract income tax but federal estate taxes may get levied on it if the grantor remains the owner of the policy.

However, the major disadvantage for someone to set-up such trust is that once the assets and policies are sifted to the trust the grantor loses his/her control over such property. In a word, an irrevocable trust is irreversible. An irrevocable trust is a separate legal entity and therefore should obtain separate tax identification number for this purpose.

Who can be my trustee?

A trustee needs to be an uninterested party, it neither can be you nor your spouse. And for the same reason not one of the beneficiaries of the trust. If a beneficiary also plays the role of trustee, he/she would enjoy the capacity to cheat the other beneficiaries. The best party to appoint as the trustee would be the bank or your accountant/lawyer.

What if I don’t want to lose control over my assets?

If you want to retain the control over the trust you should consider creating revocable trust/living trust instead. With the revocable trust you would retain the power to manipulate and amend the terms of the trust at any point of time. Even you can fire, dissolve and appoint new trustee whenever situation arises.

The main advantage of creating a living trust is that upon your death the assets with the trust wouldn’t require to be probated. But remember to be careful about choosing the proper trustee for the rust and also appoint a successor trustee to avoid future complications.