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Life Insurance Trusts
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By Igor Krishtul, ChFC, EA
insurance is a unique product. It is different from other financial
products. Not only that, it is different from other insurance
contracts. Life insurance plays a vital role in many aspects of
financial and estate planning.
trusts play an important role in your planning as well. Living trusts
provide an efficient way to own, manage and distribute property –
both during life and after death.
life insurance and living trusts form a very powerful, efficient and
flexible financial and estate planning tool. Any trust that owns or is
a beneficiary of a life insurance contract may be referred to as a life
are many “experts” claiming that a life insurance trust
must be irrevocable. Unfortunately, they include both insurance and
legal professionals. Let me share a little secret with you – this
is not true. That’s right, your life insurance trust does not
have to be irrevocable.
people (including advisors) believe that life insurance death benefits
avoid probate. This may or may not be true. The death proceeds payable
to a competent adult beneficiary normally do not require probate. Your
life insurance beneficiary, however, can be a minor or mentally ill
person. In this situation, the case will end up in a probate court.
people name their estate as beneficiary. Sometimes, this is done
intentionally. More frequently, this is done in error. An estate may
also become a beneficiary of death proceeds by default. Whatever the
reason, when the death proceeds are payable to the estate, they do not
in a revocable trust are included in taxable estate. But, your estate
may not be plentiful enough to worry about tax savings. Also, estate
taxation may not be your primary concern. Keep in mind that saving
taxes is only one of many elements of your estate plan.
life insurance trusts cause additional headaches. But, they offer
benefits not available otherwise. If your estate is big enough, it
makes sense to consider irrevocable trusts. Also, keep in mind that
life insurance can substantially increase your estate at death.
grantor loses control over property held in an irrevocable trust. In
substance, he or she is no longer the true owner of the policy. This
fact is recognized by the IRS. Accordingly, the death benefits are not
subjected to estate taxation. This exclusion does not come
there must be no incidence of ownership in a life insurance policy by
the grantor. If an insurance policy is transferred to an irrevocable
trust within three years of death, the proceeds will be included in
taxable estate. Don’t seem like much, right? Yes. But, there are
other strings attached.
contributed to life insurance trusts is used to pay life insurance
premiums. Accordingly, this money is not available to trust
beneficiaries for withdrawal. In other words, they have no way to
immediately enjoy the property (e.g. money) gifted to such trusts. This
raises the issue of gift taxation. The IRS brought this up in Crummey
vs. Commissioner case back in the 1960s. To make the story short,
additional steps must be taken to get most benefits out of the
If you own life insurance contract or are in a process of applying for one, you should at least consider setting-up a life insurance trust. This can greatly benefit you and your loved ones. Such trusts can be created specifically for your life insurance. Your trust can also own insurance along with other assets.
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