Life insurance coverage policies are generally “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 transferred from the policyholder to a trustee. Upon the insured’s death, the survivor benefit will be paid to the trustee and distributed to the beneficiary or beneficiaries by the trustee.
Why Usage a Life Insurance coverage Trust?
Although life insurance trusts do not normally provide advantages over personally-owned policies to the typical customer, there are a couple of scenarios 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 advantage is moved to the insured’s estate following his or her death (see our previous blog site post), it may be subject to estate taxes. However, 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 typical life insurance coverage policy, the death benefit is moved from the insurer directly to the recipient or beneficiaries upon the insured’s death. Nevertheless, life insurance trusts may pay for full discretion over distribution of the death advantage to a relative or buddy as trustee, allowing them to control who gets what and when. This can be helpful when kids or economically reckless adults, who could not be trusted with the full death advantage, are called as recipients to the trust. In addition, since the trustee (instead of the recipient) controls the death benefit, it is safeguarded from the recipient’s creditors.