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An irrevocable life insurance trust gives you more control

When you buy life insurance, you can pick a beneficiary. If you pass away, the policy then pays out to your beneficiary.

While this seems simple, it can be problematic. Do you really want the person to get a lump sum all at once? Do you want him or her to be able to use the money for anything?

To get more control, you may want to consider an irrevocable life insurance trust (ILIT). The policy then pays out into the trust and the money is distributed in accordance with the stipulations you designed.

For instance, perhaps you want the money to make sure that your children can afford college, even if you pass away. You can set the trust up so that the money buys their education and pays tuition, limiting how it can be spent.

Or perhaps you're worried that your children will just blow all of the money on cars, vacations and frivolous items. You can set it up so they money can be used as a down-payment on a home, to start a business or to pay for other things you deem necessary.

This is something parents often worry about when their heirs are young. Though technically an adult, is a 21-year-old college student really a person you trust to make all of the right decisions with a sudden $500,000 windfall?

As you do your estate planning, if you have insurance, it may be worth considering an ILIT. Never assume there's only one way to pass money on to your heirs. It's worth knowing the ins and outs of the process to make the best possible decision.

Source: FindLaw, "The Irrevocable Life Insurance Trust," accessed July 05, 2017

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