Estate Planning in Practice: Life Insurance Trusts


Estate planning is often a long and complicated process. Considering estate taxes could take up a significant portion of your assets after death, it’s good to know there are options to reduce or eliminate estate taxes.

One such option is a life insurance trust.


Need to Know

An irrevocable life insurance trust gives you more control over your insurance policies and the money that’s paid from them.

The basics of the trust are as follows:

  • The insurance trust owns the policies, not your estate
  • Estate taxes are reduced or even eliminated
  • The trust can buy extra insurance (also not include in your estate)
  • Proceeds not subject to probate or income taxes
  • Also free from estate taxes

Your family benefits by having the insurance proceeds available immediately after your death. This is an inexpensive way to pay estate taxes and other final expenses. And you can leave more money to your loved ones.


Major Components

There are three components to an insurance trust: the grantor, the trustee and beneficiaries.

Grantor: You set up the trust; therefore, you are the grantor. As the grantor, you select the trustee. You can be your own trustee, but know that you won’t receive the same tax advantages.

Trustee: The trustee manages the trust. He or she (or you) will purchase an insurance policy naming you as the insured and the trust as owner and beneficiary.

You want to choose someone who’s responsible and objective. Popular options for trustees are spouses, adult children and a bank or trust company. Whichever option you choose, make sure the trustee has the time and knowledge to properly administer the trust and ensure premiums are paid promptly,

When the insurance benefit is paid after your death, the trustee will collect the funds, make them available to pay estate taxes and other expenses — including debts, legal fees, probate costs, and income taxes due on IRAs and other retirement benefits. Then, the trustee distributes the remaining funds to the trust beneficiaries as you instructed.

 Beneficiary: Most people understand this term. The beneficiary is the person or parties to whom your assets pass after your death. You can typically change the beneficiary at any time before your death.



The following scenarios present some drawbacks when it comes to the trust:

  • If someone else owns a policy on your life and dies first
    • What happens: the cash or termination value will be in his or her estate, an unhelpful situation
  • If someone else owns the policy
    • What happens: you lose control of naming beneficiaries, plus the policy could be cancelled, its cash value taken or the policy garnished to satisfy the trustee’s creditors

The bottom line is that an insurance trust is safer because it allows you to reduce estate taxes and maintain control of your estate plan.


You’re in Control

With an insurance trust, your trust owns the policy. The trustee you select must follow the instructions you put in your trust. And with your insurance trust as the beneficiary of the policies, you will have more control over the proceeds. Maybe you could use the trust to provide your spouse with lifetime income and keep the earnings out of both of your estates. Profits that stay in the trust can be protected from courts, creditors, spouses and even irresponsible spending.



There are three basic restrictions you should be aware of:

  • There may be limits on transferring existing policies to the trust
  • If you die within three years, the IRS considers the trust invalid and proceeds are included in your taxable estate
  • There may be a possible gift tax

These trusts can be complex to set up and are not for everyone. On the other hand, a life insurance trust can be an effective way to reduce taxes and maintain control over your assets. If you think this might be an option for you and your family, call or email us and we can help you decide the best course of action.


How Can We Help?


Leave a Comment

Your email address will not be published. Required fields are marked *