Life insurance trusts are designed to control and protect life insurance policies during the insured’s lifetime. Many estate planners include life insurance trusts in their estate plans to provide tax-free death benefits to their loved ones and protect the insurance policy from divorce and creditors.
At Jones, Gregg, Creehan & Gerace, LLP, our estate planning attorneys are prepared to help you protect your goals, including safeguarding your life insurance policy for your loved ones. We will guide you through the process of adding a life insurance trust to your estate plan or creating a comprehensive estate and asset protection plan, ensuring that all legal requirements are met and your interests are protected.
How Do Irrevocable Life Insurance Trusts Work?
Irrevocable life insurance trusts (ILIT) are legal entities that hold and manage one or more life insurance policies. To protect life insurance policies from creditors, the trust must be irrevocable, meaning the trust’s creator won’t be able to change or revoke the trust agreement terms after it’s been created. The trust will manage insurance premiums and cash value and ensure benefits are distributed to the beneficiaries of the trust after your death.
The Benefits of Creating a Trust for a Life Insurance Policy
When you create a life insurance trust, you’ll have the right to direct the distribution of the policy’s proceeds according to your wishes. The insurance policy and assets will be protected from most creditors and lawsuits. Also, the insurance benefits won’t be part of your taxable estate. All income and capital gains earnings from insurance policy investments are tax-exempt, which can save your loved ones significant money.
How to Set Up a Life Insurance Trust
Working with an attorney can help you ensure your life insurance trust is set up correctly and will protect your life insurance policy as intended. When you create the trust, you’ll need to select a manager or trustee who will manage the trust’s assets for the benefit of your beneficiaries—choosing a person you trust and who can act as the trustee is essential. Some estate planners choose professionals, such as attorneys, banks, or property management companies, to act as their trustees.
After obtaining life insurance to fund the trust, an attorney can create the trust documents. Once the trust is established, you will need to name the trust as the beneficiary of the life insurance policy. This involves updating the beneficiary designation with your insurance company. You will also need to transfer enough assets into the trust to pay for insurance premiums, which can be done through a simple financial transaction.
Who Should Consider a Life Insurance Trust
Individuals with a net worth of $5 million or more and who own permanent life insurance policies will benefit from creating an irrevocable life insurance trust. Additionally, if you own your own business or most of your assets are in real estate, creating a trust will allow your beneficiaries to access cash after your death. Doing so may help them avoid selling part or all of your business or real estate to pay estate taxes. Finally, if your profession makes you vulnerable to lawsuits, it is important to protect your assets from judgments and creditors by placing them in an irrevocable trust.
How Does a Life Insurance Trust Reduce Death Taxes?
Federal estate taxes are expensive. Individuals with estates valued at $13.61 million for an individual or $27.22 million for a married couple or higher are subject to estate taxes upon their death. In 2026, the base exemption amount for federal estate taxes is set to decrease significantly again.
Heirs must pay estate taxes in cash within nine months after you pass away. In addition to federal estate taxes, Pennsylvania imposes a separate inheritance tax. The percentage of the tax depends on the heir’s relationship with the decedent. Direct descendants and lineal heirs must pay 4.5 percent. Siblings pay 12 percent, and other heirs must pay 15 percent.
Many heirs need to liquidate assets, such as homes, to pay estate taxes. When you own a life insurance policy in your name, the benefit will count toward your total estate. However, when you transfer your life insurance policy into an irrevocable life insurance trust, the benefit won’t be subject to state and federal taxes. Your beneficiaries will be able to access the cash benefits quickly after you pass away without worrying about paying 40 percent of them to the federal government.
Protecting Life Insurance Benefits from Lawsuits and Creditors
When you transfer your life insurance policy into a trust, the policy will be shielded from legal judgments against you or your estate. Without this protection, a court could seize, freeze, or garnish assets from your estate.
A life insurance trust provides a secure shield for your policy against creditors who could otherwise garnish your bank accounts or place a lien on your property. When a life insurance trust protects your assets, creditors won’t be able to touch anything owned by the trust, even after your death.
Disadvantages of Life Insurance Trusts
The main disadvantage is the fact that it’s irrevocable. Because the trust is irrevocable, you won’t be able to change or revoke it once it has been finalized and established. You won’t be able to direct the trustee in managing the trust. If you begin to lose faith in the trustee’s management practices, you won’t be able to select another trustee unless you can prove fraud has occurred. However, some trust agreements include provisions allowing changes to the trustee with the beneficiary’s permission.
Contact Our Life Insurance Trust Attorney in Pittsburgh
Creating a life insurance trust is crucial if you’d like to ensure your life insurance policy remains protected for your loved ones. The attorneys at Jones, Gregg, Creehan & Gerace LLP have an in-depth understanding of Pennsylvania estate planning laws. We will work with you to create an estate plan focused on your unique needs and goals. Contact Jones, Gregg, Creehan & Gerace LLP to schedule a case evaluation with one of our skilled attorneys.