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What is an irrevocable life insurance trust?

Many people in Pennsylvania understand the importance of having a life insurance policy. One of the most commonly purchased financial products, life insurance provides loved ones with crucial funds that can help to replace the policy owner's income and ensure that burial costs and other expenses are taken care of. Despite the benefits, a life insurance policy can create some estate planning issues that an irrevocable life insurance trust can help to solve.

Like other financial trusts, an irrevocable life insurance trust can be used to remove a valuable asset from a person's estate. Because the trust is deemed the owner of the life insurance policy, the original policy owner will have a smaller estate with less tax liability for their beneficiaries. Placing life insurance in a trust can also allow a person to have more control over who receives the proceeds of the policy and when they will receive them.

If an individual has debt, using an irrevocable life insurance trust can protect the cash value of their life insurance policy from seizure by creditors. By dictating how beneficiaries will be allowed to spend money from a life insurance policy, an individual can also help their beneficiaries to avoid becoming ineligible for certain government benefits such as Medicaid.

Some people may be interested in setting up an irrevocable life insurance trust if they have a sizable life insurance policy and they do not wish to overwhelm their beneficiaries with a sudden financial windfall. Because the rules and guidelines relating to irrevocable trusts are stringent, an individual might want to work with an an attorney who has experience in preparing these types of trusts before going forward.

Source: FindLaw, "The Irrevocable Life Insurance Trust", accessed on Feb. 8, 2015

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