Estate Plan Update: New Life Insurance Option life insurance trust

Asset Protection

Life insurance can be a great estate planning tool. Payments generally do not go through probate, loved ones may not need to struggle financially after one’s death, and proceeds can be protected from creditors. A new option called a reversionary annuity may prompt individuals to update their estate plans.
Life Insurance and Annuity Proceeds
Reversionary annuities provide proceeds of a life insurance policy in specified increments and amounts throughout the beneficiary’s life. Payouts occur only if the beneficiary outlives the insured. Why might this be an attractive option? Beneficiaries will enjoy a monthly stream of income throughout their entire lives instead of one lump sum. (Individuals concerned about a lump sum being mismanaged or tapped by creditors can read about ILITs below.) Also, premiums are generally lower for new reversionary annuity products than standard life insurance policies. As trends show that individuals are making heirs wait for the transfer of wealth, this new option ties into demand.
Reversionary Annuity Drawbacks
What are the disadvantages? Once a reversionary annuity is in place, it is irrevocable. Individuals should be certain about the designated beneficiaries. Since the beneficiary is required to outlive the insured, in the event the beneficiary predeceases the insured, the policy terminates without value. The lifetime income benefit may not be transferred. Certain provisions may be include in these annuities that allow refund of premiums if beneficiaries are age 80 or younger.
Protecting Life Insurance from Creditors
Irrevocable Life Insurance Trusts (ILITs) are vehicles that protect life insurance proceeds from creditors, and offer tax benefits as proceeds pass in trust and are not included in the decedent’s taxable estate. ILITs can offer a similar monthly stream of income that reversionary annuities provide. Special structuring of these trusts may include custom provisions that impose requirements for distributions. Distributions may be timed and rules established for their use, which helps manage spendthrift threats. Since these trusts are irrevocable, individuals should work closely with an attorney to ensure their wishes are preserved adequately. Read more about how to change an irrevocable trust in North Carolina with trust protectors.
Be advised undisclosed changes to Veterans Affairs life insurance policies and annuities have created issues with the Security Exchange Commission. Learn more about caps, payment suspensions, and balance restrictions here.
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