Life insurance policies are typically “owned” by the insurance policy holder, i.e. the individual who obtains and pays premiums on the policy. Life insurance coverage trusts are created when ownership of a policy is moved from the policyholder to a trustee. Upon the insured’s death, the survivor benefit will be paid to the trustee and dispersed to the recipient or recipients by the trustee.
Why Usage a Life Insurance coverage Trust?
Although life insurance trusts do not usually offer advantages over personally-owned policies to the typical consumer, there are a few scenarios in which producing a life insurance trust may be prudent.
Although recent tax changes more than doubled the exemption threshold for federal estate taxes, estates worth over $11.18 million are still subject to a 40% tax rate. If the death advantage is moved to the insured’s estate following his/her death (see our previous article), it may undergo estate taxes. Nevertheless, 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 common life insurance coverage policy, the survivor benefit is moved from the insurer directly to the beneficiary or beneficiaries upon the insured’s death. Life insurance coverage trusts might afford complete discretion over circulation of the death benefit to a family member or close buddy as trustee, permitting them to control who gets what and when. This can be beneficial when kids or economically irresponsible adults, who could not be relied on with the complete survivor benefit, are called as beneficiaries to the trust. In addition, since the trustee (rather than the recipient) manages the survivor benefit, it is protected from the beneficiary’s financial institutions.