What Is A Life Insurance Trust?

What is a life insurance trust? Life insurance trusts are a good way for an insured to purchase a life insurance policy that will leave a large amount of money to his beneficiaries that will be immune from estate taxes.

Life insurance trusts are a good way for an insured to purchase a life insurance policy that will leave a large amount of money to his beneficiaries that will be immune from estate taxes. When an insured sets up his life insurance policy as a trust, this means that the value of the insurance payout is not subject to estate taxes because the insured is not the legal owner of the insurance trust. Many people find this a good way to protect their beneficiaries from having to give nearly half of the insurance policy up for taxes. There are many rules regarding life insurance trusts, however, and there are drawbacks as well as advantages.


In order for an insurance policy to be put into trust, a third party trustee must be hired to handle the trust after the insured has died. The insured cannot be his own trustee because that would make him the owner of the trust and therefore the trust would be subject to the estate tax upon his death. Joe Sostarich, a 26-year veteran of life insurance sales and management tells us, "Third party trustees can be arranged through banks and trust companies. A trustee will charge an annual fee for their services and will handle the administration of the trust until the beneficiaries are of age." Joe also adds, "In some cases, the legal age for a beneficiary to access a trust is 21, but sometimes the age is 18." A beneficiary could also be a husband or a wife and you can arrange for the trust to pay them an income after you die. This can be a good way to ensure that a spouse is taken care of without worrying about a lump sum of money being squandered.




Once a person sets up an insurance trust he can never again change the beneficiaries to the trust. While the insured person can decide who the beneficiaries of the trust will be, he can never change the names if family issues arise in the future. For example, if you have a falling out with one of your beneficiaries or become divorced from one, he or she will still be entitled to a portion of your life insurance policy when you die.

Another drawback to the life insurance trust is that it cannot be borrowed against. No matter how much value your trust accrues, you will not be able to access it. You can also never take your life insurance policy out of a trust once you have put it in. You may also have trouble with gift taxes when you put money into the trust to pay the premiums when your trust is not fully endowed. Additionally, if your trust is a small one you may have trouble finding a professional trustee who will agree to administer the trust.

Another kind of life insurance trust is an automatic one that occurs when an insured's regular insurance policy is left to beneficiaries who are not yet of age. Joe says, "When an insured dies before his children are of the legal age, the policy is put into a trust which earns interest until the children can receive the money."

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