Life Insurance Trust

With estate tax rates running as high as 46%, individuals and families who find themselves sitting on large parcels of cash are constantly on the look out for ways of protecting their assets against this some say punitive task, and leave as much of their estate intact for their loved ones.

As well as much as instead of, people are looking to establish life insurance trusts, to purchase and own life insurance policies. However life insurance policies held in the trustor's name at the time of their passing will be liable for estate tax. However if the trustor transfers ownership of the life insurance policy to their benefactors then the proceeds will be both free of income tax and estate tax. Using this shelter, the trustor can save considerable sums of money for his benefactors.

Once the policy has been transferred to the insurance trust, the terms agreed become totally irrevocable. In other words, the trust becomes the sole beneficiary of the policy's income and alone the trustee (who cannot be the trustor) can disburse the proceeds of the policy, and only after the trustor's passing. Also the beneficiaries of the policy/trust cannot be changed. In addition the insured/trustor will be disallowed from borrowing against the policy's equity. If, due to extenuating circumstances, the trustor needs to borrow against the policy, then the trustor will be seen to be the policy's owner in the eyes of the law, and will need to pay estate taxes on the proceeds, and only after they have been through probate.

In the event that the trustor transfers an existing life insurance policy to an insurance trust, and passes away any time up to three years after the date of transfer then the proceeds of the policy will still be liable to have estate tax applied to them.

Once the insurance trust has been established, it become irrevocable and the policy cannot be rescinded. In the event that the trustor suffers deterioration in their health or in their personal or business circumstances, they will remain committed to their insurance trust as their only form of life insurance.

Another potential disadvantage of establishing a life insurance trust is possible exposure to gift tax liability. This can occur if the policy given to the trust has value or if gifts of funds to pay premiums.

Once the trustor has absorbed the implications, both positive and negative of establishing an insurance trust, the trustor will need to set about sourcing and appointing a trustee, as the insured trustor is forbidden as acting as his own trustee for a life insurance trust. However the procedures involved are pretty straightforward and most banks and estate planning companies are pleased to offer this service at a nominal fee. Their reason for this is that establishing an insurance trust requires very little establishment or administration costs.

If you, like a lot of other people, are prepared to invest the time and money to establish a life insurance trust then you should be content in the knowledge that your loved ones will eventually reap the benefits. Under normal circumstances, the foundation of such a trust will allow you to remove a significant asset from your estate an asset that you are unlikely to require access to during your life. And if you dot the i's and cross the t's properly it will ensure that the proceeds arrive in their entirety to your loved ones, and not to your friends in the federal government.