What is a life insurance trust?
Please remember that this answer is provided in the spirit of public education, not as legal advice. If you require legal advice for a particular situation, you should consult an attorney. A life insurance trust is a trust that is set up for the purpose of owning a life insurance policy. If the insured is the owner of the policy, the proceeds of the policy will be subject to estate tax when he dies. But if he transfers ownership to a life insurance trust, the proceeds will be completely free of estate tax. (The proceeds will be exempt from income tax either way.) Given the current estate tax rate of 45%, a life insurance trust can save hundreds of thousands of dollars in estate taxes. However, there are several drawbacks to such an arrangement: 1. You can’t change the beneficiary of the policy. The insured must give up the right to change the beneficiary of the policy (the trust itself will be the beneficiary). The trustee alone has that right, and the insured cannot serve as trustee o
A Life Insurance Trust is an Irrevocable Trust set up for the purpose of owning a life insurance policy. A Life Insurance Trust is more commonly used when the combined assets of a client, including all life insurance, retirement benefits, real estate and other financial assets exceed estate tax exemptions. In the State of New Jersey, the exemption limitation for non-spouses is only $675,000. In New York State, the exemption is $1 million. As such, it is easy to exceed the limit when taking into account all of a client’s assets. A properly drafted Life Insurance Trust will protect life insurance from estate taxation, while keeping the funds available to a client’s heirs as needed. When applying for a new life insurance policy it is important to create the life insurance trust prior to applying for the new policy and have the life insurance trust be the applicant and owner of the policy. Insureds must live 3 years from the date of the transfer to a Life Insurance Trust in order for the p
A life insurance trust is an example of a trust that is non-revocable and cannot be amended once it is set in place. The trust functions as both the owner and the recipient of the proceeds from one or more life insurance policies. Upon the death of the ensured party, the trustee or administrator of the trust oversees all functions established for the operation of the trust, including making disbursements to beneficiaries in a manner specified by the terms of the trust. In some countries, the establishment of a life insurance trust rather than simply taking out life insurance coverage can be extremely helpful to the beneficiaries. Depending on how the trust is structured, there is a good chance that estate taxes will not be incurred on any disbursements made by the trust. This effectively places more of the funds into the possession of all beneficiaries without creating tax issues for each beneficiary to deal with. Another important reason for considering a life insurance trust rather t
To set up a life insurance trust, the owner of the life insurance policy transfers ownership of the policy to a trust. The life insurance trust is irrevocable, which means that the policy owner cannot get back ownership of the insurance policy. Upon death, the death benefit is paid to the trust for the benefit of the named beneficiary (or beneficiaries) without being subject to estate taxes. Life insurance trusts must be established with extreme caution and forethought, because they are irrevocable and the beneficiaries cannot be changed once named in the trust.
