Redding, California, Law Blog

How do life insurance trusts work in California?

On Behalf of | Feb 10, 2023 | ESTATE PLANNING - Trusts

California residents setting up their estate plans might be looking into setting up a trust for their loved ones. Trusts give a certain amount of protection from probate and estate taxes and make it easy to pass along assets.

Many California residents might turn to a life insurance trust – also known as an Irrevocable Life Insurance Trust. This trust is set up with a life insurance policy to provide long-term support for your beneficiaries.

The ins and outs of a life insurance trust

Trusts are their own entity by legal standards; your beneficiaries don’t own anything in the trust, they just benefit from it. Trusts protect assets from creditors, estate taxes, and even legal troubles down the line.

The person setting up the trust, referred to as the grantor, will work to set up the rules and conditions that must be met for beneficiaries to receive any payout from the trust. The trustee will be responsible for managing the beneficiaries’ payouts and ensuring these rules are followed.

When you should use a life insurance trust

ILITs are a popular choice for grantors looking to exert some control over their beneficiary’s inheritance. A grantor worried about their beneficiary blowing through the money will often pick an ILIT so the money can be dispensed over a longer period rather than all at once.

Grantors looking to take care of a beneficiary who cannot make their own financial decisions or earn money due to a disability might also consider setting up an ILIT. This can give them peace of mind that their loved one will be cared for.

Things to keep in mind

Once you set up an ILIT, you can’t make changes to how it’s dispensed or take back the money. This can make it a risky investment for some people. But most of the time, the peace of mind that comes from setting up an ILIT is worth it for many people.