Life insurance coverage policies are typically “owned” by the insurance policy holder, i.e. the individual who obtains and pays premiums on the policy. Life insurance trusts are created when ownership of a policy is transferred from the insurance policy holder to a trustee. Upon the insured’s death, the survivor benefit will be paid to the trustee and distributed to the recipient or beneficiaries by the trustee.
Why Usage a Life Insurance Trust?
Although life insurance trusts do not usually offer benefits over personally-owned policies to the average consumer, there are a few circumstances in which creating a life insurance coverage trust might be prudent.
Although recent tax modifications more than doubled the exemption threshold for federal estate taxes, estates worth over $11.18 million are still based on a 40% tax rate. If the survivor benefit is moved to the insured’s estate following his/her death (see our previous article), it may undergo estate taxes. If the policy was owned by a trustee as part of a trust, it will get away taxation on the insured’s estate since it is not technically “owned” by the insured.
Control Over Distribution of Death Benefit
In a normal life insurance coverage policy, the death advantage is moved from the insurance business directly to the beneficiary or recipients upon the insured’s death. However, life insurance trusts might manage full discretion over distribution of the death advantage to a family member or friend as trustee, permitting them to manage who gets what and when. This can be useful when children or economically careless adults, who might not be relied on with the complete death benefit, are named as recipients to the trust. In addition, since the trustee (instead of the recipient) manages the survivor benefit, it is protected from the beneficiary’s lenders.