Vrakas CPAs, Here Are Your Articles for Wednesday, September 13, 2017
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Life Insurance Trusts: Powerful Tax-Savings Vehicles


An irrevocable life insurance trust gives you more control over your insurance policies and the money that's paid from them. It also lets you reduce or even eliminate estate taxes so as much of your estate as possible can go to your loved ones.

The trick here is that the insurance trust owns your insurance policies — you don't personally own the insurance — so it won't be included in your estate. This means your estate taxes are reduced. You can have the trust buy additional life insurance that will not be included in your estate. The proceeds are not subject to probate or income taxes, and they're also free from estate taxes.

Insurance proceeds are available right after you die so your assets won't have to be liquidated to pay estate taxes. This is an inexpensive way to pay estate taxes and other expenses while allowing you to leave more to your loved ones.

The mechanics of the trust

There are three components to an insurance trust. The grantor is the person who creates the trust — you. The trustee you select manages the trust. Trust beneficiaries that you name will receive the trust assets after you die.

The trustee purchases an insurance policy naming you as the insured and the trust as owner and beneficiary. 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.

You can be your own trustee, but unfortunately, you won't get the tax advantages. This is why some people name their spouse or adult children as trustee, but these individuals may not have enough time or experience to deal with this. Using a corporate trustee — a bank or trust company — makes sure the trust is properly administered and insurance premiums are promptly paid.

Now, if someone else — your spouse or adult child — owns a policy on your life and dies first, the cash/termination value will be in his or her taxable estate and that doesn't help much. But more importantly, if someone else owns the policy, you lose control. The beneficiary could be changed, the cash value could be taken or the policy could be cancelled, leaving you with no insurance. The policy even could be garnished to help satisfy your trustee's creditors. An insurance trust is safer — it lets you reduce estate taxes and keep control.

Control and safety

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 even will have more control over the proceeds. Perhaps you could use the trust to provide your spouse with lifetime income, keeping the earnings out of both of your estates. Profits that stay in the trust can be protected from courts, creditors and even spouses — and irresponsible spending.

Know that there are restrictions on transferring existing policies to an insurance trust. If you die within three years of the date of transfer, the trust will be considered invalid by the IRS and the insurance will be included in your taxable estate. There also may be a gift tax.

These trusts can be complex to set up and administer and are not for everyone, or every situation. Give us a call, and we'll help you decide whether an insurance trust is right for you.



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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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