Variable Insurance Trust: The Ultimate Estate Planning Tool

Variable insurance trusts, or VITs, are a powerful estate planning tool that can provide numerous benefits, including:

• Tax-free accumulation: Assets held in a VIT grow tax-free, meaning no capital gains taxes are owed on investment earnings. This can lead to significant wealth accumulation over time.
• Death benefit protection: VITs provide a death benefit to designated beneficiaries, which can be used to cover expenses such as funeral costs, estate taxes, and other debts.
• Creditor protection: Assets held in a VIT are typically protected from creditors, both during the life of the trustor and after their death. This can be valuable for individuals who are concerned about preserving their assets from potential lawsuits or other liabilities.

How Variable Insurance Trusts Work

VITs are typically established by partnering with an insurance company, which issues a life insurance policy that funds the trust. The trustor then transfers assets to the trust, which are invested according to the terms of the trust agreement. The death benefit from the life insurance policy is paid to the trust upon the death of the trustor, and the trust assets are then distributed to the beneficiaries.

The trustor can choose to retain control over the investment decisions made within the trust, or they can delegate this responsibility to a trustee. The trustee is responsible for managing the trust assets in accordance with the trust agreement, including making investment decisions, paying taxes, and distributing income to the beneficiaries.

Benefits of Variable Insurance Trusts

In addition to the tax-free accumulation, death benefit protection, and creditor protection benefits mentioned above, VITs offer several other advantages, including:

• Flexibility: VITs are highly flexible and can be tailored to meet the specific needs of the trustor. For example, the trustor can choose the type of investments to be held in the trust, the beneficiaries who will receive the death benefit, and the distribution schedule for the trust assets.
• Privacy: VITs are private trusts, meaning that the assets held in the trust and the terms of the trust agreement are not subject to public disclosure. This can be beneficial for individuals who wish to keep their financial affairs private.
• Estate planning: VITs can be used as an effective tool for estate planning. By transferring assets to a VIT, the trustor can reduce their taxable estate, avoid estate taxes, and ensure that their assets are distributed to their intended beneficiaries.

Considerations for Establishing a Variable Insurance Trust

Before establishing a VIT, it is important to consider the following factors:

• Cost: VITs can be more expensive to establish and maintain than other types of trusts. This is due to the cost of the life insurance policy that funds the trust.
• Complexity: VITs can be complex to establish and manage. This is why it is important to work with an experienced attorney to ensure that the trust is properly drafted and administered.
• Tax implications: While assets held in a VIT grow tax-free during the life of the trustor, the death benefit may be subject to estate taxes or income taxes depending on the type of life insurance policy used to fund the trust.

Tips for Establishing a Variable Insurance Trust

If you are considering establishing a VIT, here are some tips to help you get started:

• Talk to an attorney. An experienced estate planning attorney can help you determine if a VIT is right for you and can help you establish the trust properly.
• Compare life insurance policies. There are many different types of life insurance policies that can be used to fund a VIT. It is important to compare policies from different insurance companies to find the best policy for your needs.
• Consider your investment goals. The investments held in a VIT should be tailored to your investment goals. For example, if you are seeking long-term growth, you may want to invest in stocks. If you are seeking income, you may want to invest in bonds.

Common Mistakes to Avoid When Establishing a Variable Insurance Trust

Here are some common mistakes to avoid when establishing a VIT:

• Naming yourself as the trustee. While it is tempting to name yourself as the trustee of your VIT, this can have negative tax consequences. It is better to name an independent trustee who will manage the trust assets objectively.
• Not funding the trust properly. It is important to fund your VIT with sufficient assets to cover the costs of the life insurance policy and other expenses. If you do not fund the trust properly, the trust may not be able to achieve its intended purposes.
• Not reviewing the trust regularly. As your financial situation and estate planning needs change, it is important to review your VIT and make changes as necessary. A regular review of the trust will help to ensure that it continues to meet your needs.