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What you need to know about life insurance trusts in California

On Behalf of Masatani Soroy Law | Nov 30, 2022 | Estate planning |

If you have a life insurance policy, there’s a good chance you’ve considered how to leave your loved ones with the financial security they need if something happens to you. You can further enhance this security by creating a life insurance trust in California. However, before you do so, there are some important considerations to make.

Life insurance trust explained

A life insurance trust is an estate planning tool that a person can use to manage a life insurance policy. It can be irrevocable or revocable. An irrevocable trust is set up by an individual who assigns a trustee to manage the policy going forward. The trust takes ownership of the policy, and the trustee will distribute any death benefit payments in accordance with the trust’s instructions. A revocable trust is more flexible, as it allows you to change or revoke the arrangement while you are alive.

How it works

An individual establishes a life insurance trust in California by signing and notarizing a written document. This document outlines the terms and conditions of the trust, as well as its purpose. So typically, after you die, the trustee will collect the proceeds from the policy and distribute them according to your instructions. They will also pay any taxes, debts and other expenses you may have incurred prior to your death.

Benefits of a life insurance trust

One of the biggest benefits of a life insurance trust is that it helps bypass probate court. This means your beneficiaries won’t need to go through a public process to access the funds they receive from the policy. Additionally, because no one else has ownership over the policy, you can rest assured knowing that people will only use your assets how you intended.

If you think this trust is the best option for you and your family, there are a few things to consider before setting one up. One is that after transferring the policy to the trust, you can no longer make changes or cancel it. Moreover, as much as LITs are not taxed as part of the insured’s estate, the state can tax the beneficiaries for the proceeds they receive, which could still be a burden for them.

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