Was I Wrong for Putting My Life Insurance in a Trust?

In this video,

I'm going to be reacting to five assets you should never put in a trust.

A guy by the name of Rob will link his

YouTube channel down below.

And he mentions in this video

IRAs, 401ks,

employer plans,

annuities,

vehicles,

and then life insurance is the piece that I'm going to be watching and hearing what he has to say.

Finally,

life insurance.

There's a ton of confusion around this topic.

But generally speaking,

life insurance avoids probate by design.

as long as your beneficiaries are set up properly.

That means naming your spouse,

your kids,

or other loved ones as beneficiaries directly with the insurance company.

When you do that,

the money from the life insurance policy will go straight to them.

No court,

no delay,

and no public record.

But some people make the mistake of titling life insurance policies in the name of their living trust because they've

heard about all sorts of different strategies and tax advantages out there today.

But in reality,

for most people,

having your trust own your life insurance policy just causes unnecessary complications without any added benefits.

Doing this could actually reduce the flexibility,

lead to administrative headaches,

or even open the door to unexpected taxes that you were trying to avoid in the first place.

Now,

There are advanced cases that you may have heard of where people use irrevocable life insurance trusts,

also called

ILITs, to keep large death benefits out of their taxable estate.

But an irrevocable trust is much different than a revocable living trust,

which is what most people have.

and unless you're

over the federal estate tax exemption,

which currently is $14 million per individual or $28 million for a married couple,

or live in a state with a very low estate tax threshold,

that's probably something that you don't need to worry about.

For most families,

naming individual beneficiaries or even naming your living trust as the beneficiary without changing

ownership of the policy is the best way to go,

especially for large policies.

Having your trust inherit the life insurance policy can help you maintain control of that money and protect the money from claims,

creditors,

or divorce after you're gone.

Just remember that naming your trust as the beneficiary of the policy is much different and the trust becoming the

owner of the policy.

And this is the key distinction to keep in mind.

All right.

Yeah.

I mean,

I think that's pretty straightforward video.

What we're going to do is we're going to take a step back.

So let's talk about life insurance.

What is life insurance?

Life insurance is a contract between the owner and the insurance company.

Okay.

So you want to make sure the insurance company is great,

but the owner does not have to be the same person as the insured.

Okay.

So the owner is the person that is responsible for paying premiums and ultimately has the control of that contract.

Common thing when you're thinking about life insurance is you are the owner and the insured.

I'll take myself as an example.

I go get a life insurance policy.

I'm the owner and I'm also the insured,

meaning that

I'm underwriting my own life and I'm responsible for the premiums,

all that stuff.

And then when I pass away,

the money gets to go towards my beneficiaries.

And now let's say the owner and insured are different people.

This is common when people do kid policies.

So

I, my daughter.

she's not the owner of the insurance policy,

she's not 18.

So I am the owner,

I am paying premiums on her behalf,

but she's the insured.

And then when she's above 18,

I would have the option to transfer ownership if I wanted,

but I could continue to maintain ownership and control of that policy.

The other common scenario would be if I had a business partner,

you could do some type of like the business or you as the individual could still fund life insurance and there could be a different insured aspect.

The other common area is if you're not healthy,

let's say you love the benefits of life insurance,

but you're not healthy,

you could go that route and say,

I'm still going to be the owner of the life insurance policy,

but I'm going to have someone that I have insurable interests.

Kid,

spouse,

business owner,

maybe a family member.

And you just have to be able to justify to the insurance company that,

hey,

there's a reason why I'm going to be the owner,

but they're going to be the insured.

And so there has to be what's called an insurable.

interest there.

Now let's talk about the beneficiaries of the trust.

So I would agree with him.

There's very few cases that having the trust own the life insurance makes sense.

I'll talk about that at the end.

But now let's talk about the beneficiary of the trust.

Now in most cases,

I would say across the board,

majority of people do not have to worry about estate taxes.

So income from a death benefit get paid income tax-free.

So let's say you have $5 million estate,

you're not worrying about estate taxes,

and let's say $2 million of that is actually the death benefit.

You pass away,

your death benefit will get paid income tax-free to the next generation.

Now,

it can pass.

It can pass very efficiently.

If you have the names on the life insurance contracts,

it can go,

directly to them super quickly,

that could be one of the benefits.

And so,

and there's some cases where people are like,

hey,

I would love that money to go directly to the individuals.

There's other cases,

if you're dealing with younger kids,

or if it's maybe a little bit more complex,

where you would say,

you know what,

I would want it to go,

the proceeds to go to a trust,

we'll call it a revocable trust.

Let's talk about where it makes sense to have life insurance owned by your trust.

This is going to happen for families who do not want to pay estate taxes.

Now you might say,

doesn't life insurance pay income tax free?

It does,

but if your estate is large enough to trigger estate taxes,

it doesn't go around the estate tax.

And so where you would want the trust to own life insurance,

this is where you would want to do some advanced planning and make sure that you're doing this right.

This is not something that you're just going to do quickly online.

You're going to work with someone that really knows what's going on.

But they would create.

irrevocable life insurance trust.

So there,

there,

again,

there's some commitment early on here,

but you create an irrevocable trust that ultimately owns the insurance policy.

The insurance policy could still be insured.

You could be the insured or someone else could be the insured,

their funding,

their owning.

And at,

and at the end of the day,

when it's all said and done,

that's,

that's a way where you can avoid estate tax and income tax when,

when.

you or a family member and the individual passes away.

And so this is advanced planning,

and there's a lot of interesting strategies that you can use when it comes to dynasty trusts.

And you even look at this book called What the Rockefellers Do,

and they had an advanced strategy where they did multiple generations where the trust actually bought life insurance when new family members came.

And so they took the irrevocable trust to avoid estate taxes to the next level and said,

you know what?

We're going to ensure that the trust continues to,

as kids continue to get born in our family,

we're going to make sure that the trust ensures that life insurance gets purchased,

we're increasing our pool of capital,

but then actually when kids pass away,

ultimately that money is going to go back into the trust.

And so it's just a way to keep wealth within the family,

and I would say that you can use a version of that.

owning your life insurance policies individually,

having yourself as individuals,

having money go to a revocable trust,

or even having your money go to somewhat of an irrevocable trust,

all that can work and where you'd want the irrevocable trust to actually own the policies is if you're sitting here and have very high likelihood of having some type of estate tax,

then it very much makes sense to do some planning.

So overall,

love this video,

love the fact that.

people are having these conversations.

It's clearly,

this person doesn't have a big YouTube channel,

but this has over 26,000 views,

which tells you that this message resonates.

And if this is something that you wanna learn more about,

we got more information.

If you want access to What Were the Rockefellers?

We're giving these books away for free,

so you can check the link down below.

And if you wanna learn more about how we can help you with life insurance,

we also have a link for you.

Thank you so much for watching,

and subscribe for our next video.

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