Life insurance policies are usually “owned” by the insurance policy holder, i.e. the individual who requests and pays premiums on the policy. Life insurance coverage trusts are developed when ownership of a policy is moved from the insurance policy holder to a trustee. Upon the insured’s death, the death advantage will be paid to the trustee and dispersed to the recipient or recipients by the trustee.
Why Usage a Life Insurance Trust?
Although life insurance coverage trusts do not typically provide advantages over personally-owned policies to the typical customer, there are a couple of circumstances in which producing a life insurance coverage trust may be prudent.
Although current tax changes 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 death benefit is transferred to the insured’s estate following his or her death (see our previous article), it might be subject to estate taxes. If the policy was owned by a trustee as part of a trust, it will leave 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 policy, the death benefit is transferred from the insurance company directly to the beneficiary or beneficiaries upon the insured’s death. However, life insurance coverage trusts may afford full discretion over distribution of the death advantage to a relative or friend as trustee, enabling them to control who gets what and when. This can be helpful when children or financially careless adults, who could not be relied on with the complete survivor benefit, are called as recipients to the trust. Additionally, considering that the trustee (instead of the beneficiary) controls the death advantage, it is safeguarded from the beneficiary’s financial institutions.