Irrevocable Life Insurance Trusts

Life insurance trusts are typically irrevocable, non-amendable trusts that own one or more life insurance policies in order to keep death benefit proceeds outside one’s estate and, therefore, avoid estate taxes. Avoiding estate taxes hasn’t been an overriding concern for the last couple years, since the exemption has been $10 million for married couples, but the exemption amount is set to revert to $1 million on January 1, 2013, which means that many, many people with life insurance will easily exceed the limit and be subject to estate taxes.

How Life Insurance Trusts Work

The trusts themselves aim to accomplish a relatively straightforward goal. Namely, removing ownership (or “incidents of ownership”) of the policy from the person whose life is insured. If the insured person is the owner, then life insurance proceeds are counted in that person’s estate, which is a result that needs to be avoided.

By giving up ownership of the policy, the creator of a life insurance trust must effectively give up the following:

• The right to change beneficiaries
• The right to cancel the policy
• The right change the terms of the policy
• The right to assign the policy
• The right to borrow against the policy

If you are the creator of a life insurance trust, then you can’t even hold these “incidents of ownership” as trustee of the life insurance trust.

Asset Protection Benefits

Life insurance trusts can potentially be very effective asset protection tools, though they are often not structured to be protective. First, they are irrevocable trusts. Second, they are not self-settled (i.e. the creator is not also the beneficiary). Third, they can provide for distributions to beneficiaries to be discretionary and they can also contain other protective provisions like spendthrift clauses.

Again, irrevocable life insurance trusts continue to be important for anyone who wants to make sure that life insurance proceeds are excluded from their estate and not subject to taxation. If you have questions about how life insurance can or should be used in conjunction with your asset protection plan, please call Lodmell & Lodmell to schedule an appointment with Lodmell & Lodmell.