Trusts Spare Your Heirs

Don't think you can set the trust up and forget about it. Depending on the type of insurance policy you put in the trust, you may need to adjust your premiums from time to time to make up for market fluctuations.

Here's why.

Remember, there are basically two types of insurance policies: term and permanent. The premiums on a term policy are paid over a fixed period of time. When the premiums end, so does the policy. If the policyholder dies while still paying the premiums, his heirs get the assigned payout income-tax free.

Permanent policies, in turn, offer a death benefit with an investment angle. A permanent policy has a cash account that allows the excess money to grow tax-deferred and these policies can go on for as long as you like.

Many of these permanent policies invest in the stock market, and, unfortunately, about 80% of them are underperforming, notes Fleming. So you might have to pay your premiums longer than expected, to reach your target. You'll need to work with your trustee to ensure that your irrevocable life insurance trust is growing at the rate you need so that your beneficiaries will have enough money to cover your estate-tax bill.

Death and taxes are not the happiest of subjects to talk about. But doing some planning now will prevent any unnecessary unhappiness when the time comes.

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