For many families, life insurance is a way to make sure loved ones are cared for after death. What happens when life insurance is tied into your trust? This strategy can be a powerful part of estate planning. It helps protect wealth, provides flexibility, and ensures that your wishes are carried out.
If you’re exploring whether this approach is right for your family, a wills and trusts lawyer in Alamogordo can guide you through the options.
Why Use a Trust to Hold a Life Insurance Policy?
When you own a life insurance policy in your name, the death benefit typically becomes part of your estate. That can create delays in probate, increase your estate’s taxable value, and leave less control over how the funds are used.
By contrast, placing the policy inside an Irrevocable Life Insurance Trust (ILIT) keeps the proceeds separate from your estate. The trust, not you, becomes the owner of the policy. When you pass away, the payout flows directly into the trust and is managed by your chosen trustee. This arrangement gives your family faster access to funds while following the instructions you leave behind.
Advantages of Using an Irrevocable Life Insurance Trust (ILIT)
An ILIT provides peace of mind by allowing you to shape how proceeds are used. Instead of a lump sum that may be overwhelming or mismanaged, the trustee can release funds gradually or only for certain purposes.
This is especially helpful for minor children, family members with disabilities, or loved ones who may not be ready to manage large sums responsibly.
Another advantage is probate avoidance. Since the trust owns the policy, the payout bypasses the probate process altogether. This means your loved ones won’t be left waiting months for court approval. In many cases, assets inside a trust are also protected from creditors, offering additional security for your family’s future.
Points to Consider Before Creating a Trust
Life insurance trusts can be powerful, but they also come with strict rules. Before creating one, here are some key points to keep in mind:
- Irrevocable structure: Once an ILIT is created and funded, you cannot change or undo it. This makes it important to be sure about your decision before moving forward.
- Timing matters: The trust must be established before applying for the life insurance policy. If the trust is created afterward, the IRS may still consider the policy part of your taxable estate.
- Premium payments count as gifts: When you pay premiums into the trust, those payments are considered gifts to your beneficiaries.
- Avoiding gift tax: To prevent gift tax issues, many attorneys use “Crummey notices.” These give beneficiaries temporary access to contributions, which allows payments to qualify for the annual gift tax exclusion.
- IRS compliance is essential: Failing to follow these steps correctly can undo the benefits of the trust.
Because of these requirements, it’s best to work closely with a wills and trusts lawyer in Alamogordo.
Coordinating Life Insurance and Your Estate Plan
A life insurance trust should never exist in isolation. It works best when it is coordinated with your will, other trusts, and powers of attorney. When all the pieces fit together, the result is a comprehensive estate plan that reduces stress, protects wealth, and ensures your wishes are carried out exactly as you intend.
Getting Started with Life Insurance Trusts in New Mexico
Estate planning can feel intimidating, but it doesn’t have to be. The biggest mistakes happen when families wait until a crisis forces them to act or attempt to create a trust without understanding the legal requirements. By planning now, you can protect your assets, avoid unnecessary complications, and give your loved ones confidence about the future.
To take the first step, register for our free masterclass or book a discovery call with Attorney Michele Ungvarsky for one-on-one guidance tailored to your situation.
Key Takeaways
- A life insurance trust removes the policy from your taxable estate and avoids probate.
- Trustees can distribute proceeds over time or for specific goals, rather than in a lump sum.
- ILITs must be set up carefully to follow IRS rules and protect the trust’s benefits.
- Working with a wills and trusts lawyer in Alamogordo ensures your trust is properly structured and coordinated with your estate plan.
References: When Does It Make Sense for a Trust to Own Your Life Insurance Policy? – J.P. Morgan and New Mexico Estate Planning Basics – State Bar of New Mexico and Life Insurance and Estate Planning – Investopedia