Life Insurance Trusts

LIFE INSURANCE TRUSTS

A Life Insurance Trust is generally used where the insured is concerned that the proceeds of the life insurance will: (1) be poorly managed; or (2) be subject to death tax in his estate or that of the beneficiary.

Most people do not realize that life insurance proceeds, although not subject to income taxes, are subject to estate tax if the policy is owned by the insured, the insured retains "incidents of ownership" in the policy, or the policy proceeds are payable to the insured's estate. By placing the proceeds of life insurance in a properly structured life insurance trust there are no estate taxes on the insured's death. Further, by creating a trust to own or acquire life insurance policies and receive the proceeds upon death, a trustee is able to manage the property, keeping the property out of the beneficiary's hands if necessary, and away from his creditors.

The Life Insurance Trust generally provides that at the death of the insured, the policy proceeds will be held by the trustee for the benefit of the non-insured spouse or children. The cash proceeds may provide a convenient "private bank" for the decedent's estate, to purchase assets from the estate or to lend the estate money to pay estate taxes. Income of the life insurance trust may be paid periodically to the surviving spouse and principal is available for support and maintenance. The trust can purchase assets from the insured's estate or the spouse in order to increase liquidity, pay taxes or cover living expenses. When the surviving spouse dies, the remaining proceeds are generally distributed outright to the children or held in trust until the children reach sufficient age and maturity to responsibly handle their portion of the funds. The absence of death taxes and income taxes on the insurance policy proceeds makes the irrevocable life insurance trust an attractive planning tool.