Do you have a life insurance policy owned by your irrevocable trust?

CLIENT QUESTION:

In an Irrevocable Family Trust set up by Lawrence, I have a Life Insurance policy. If I cancel the policy, there are residual dollars (cash value) that would be paid to the trust. What do I have to do with the funds not to disrupt the Trust?

MY RESPONSE:

I am not sure what type of irrevocable trust this is, a Medicaid Trust or an Insurance Trust, but in the end, it does not matter because the answer will be the same. The answer is that you usually have a choice: either leave the money in the trust and have it invested or have the trustees pay it out to the ultimate beneficiaries of the trust (if the trust allows it…and it usually does).

The real takeaway here is that many people overlook their life insurance when they are trying to protect their assets or reduce their taxes. When you do comprehensive planning, you need to look at who should own the policy and who should be the beneficiary of the policy. Why? Because for Medicaid purposes, the cash value is an asset that Medicaid can go after, and for tax purposes, the death benefit of your life insurance is taxable in your estate. Irrevocable trusts can help solve these problems.

I hope this helps.

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