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Filing your Trust with the IRS

Once you receive and sign your trust document, you will want to file the trust information with the IRS. When doing so, you will receive a tax identification number which will allow you to report taxes and open up a trust bank account.

Keep in mind that the trustee you selected during the intake process should be the one in charge of everything that relates to the life insurance trust, which is very important. Make sure to check out our articles to determine who you should choose as your trustee. 

Transmutation Agreements

A life insurance trust avoids estate tax inclusion because it is irrevocable, and thus no longer considered your property (as you are typically using annual gift tax exclusions to pay off insurance premiums). Simply stated, the IRS will not include the proceeds in your taxable estate because you are not receiving any benefits from the insurance policy. 

This becomes a bit more complicated if you fund the trust with marital property and also name your spouse as a beneficiary. Transmutation agreements allow you to work around this issue by changing marital property to separate property so that you can use the separate property to fund the trust.  

TOLI Trusts

Estate Planners and Insurance Agents often recommend that people create a separate trust to own their life insurance policies. Although beneficiaries will receive insurance proceeds income tax free without a trust, those proceeds may not be exempt from estate taxes. Thus, a TOLI can produce substantial transfer tax benefits.

Additionally, a trust can provide far greater flexibility with respect to asset management and eventual distribution. Moreover, the assets in the insured's spouse's and children's trust carry more protection from potential creditors.

If you are interested in learning more, check out our blog for more information!