Asset Protection

INSURANCE TRUSTS TO PROTECT INSURANCE

The life insurance trust is another valuable weapon in the asset protection arsenal. Life insuranceboth death benefits and cash valueare fully exempt from creditor attachment in several states, and nothing more need be done to protect your insurance policies in these states, except when the IRS is the creditor. Most states grant little or no protection to insurance. In all states, an insurance trust may be necessary for estate tax reasons. How can you effectively use an insurance trust?

1. Borrow as much as possible against the cash value of your life insurance. Never leave the cash or surrender value of your policies exposed to creditors. Creditors in most states have a right to claim cash dividends under policies. Since no-cash policies have no value, there are no gift taxes due from their transfer to the insurance trust.

2. Establish an insurance trust to receive your insurance policies with your spouse or some other trusted individual as trustee. Never become trustee to your own insurance trust.

3. Once the insurance policies are in trust, advance funds to the trustee to cover future premium payments.

4. Decide upon the disposition of the insurance proceeds upon your death. You may designate beneficiaries under the trust as you would under an insurance policy. For example, proceeds may be paid directly to your spouse and/or children. You may prefer the funds continuously administered for their benefit under the same trust or a separate trust.

5. Insurance trusts can be either revocable or irrevocable. If the trust is revocable, you can modify it during your lifetime or you can cancel the trust and also cancel the policy at your election. You thus retain the flexibility to change the trust to coincide with new circumstances and goals. However, upon your death the trust becomes irrevocable, and the insurance proceeds automatically flow through the trust to the beneficiaries. With the irrevocable life insurance trust, you irrevocably transfer your life insurance policies to the trust. Once transferred, you lose the ability to cancel either the policies or the trust, or change or modify the terms of the trust.

The irrevocable insurance trust offers two important advantages: First, it insulates insurance policies from creditors, which is the objective with asset protection, and, secondly, it will exclude the policies from the grantor's estate under certain conditions.

To gain the added estate tax protection, the grantor must transfer the policies from his own name and live three more years following the transfer. Insurance proceeds then pass to the trust beneficiaries free of all federal and state estate and inheritance taxes. With federal estate taxes currently consuming about one-half an estate, the insurance trust preserves the entire insurance benefits for your heirs without forfeiting halfor moreto the government. The insurance trust is thus essential for anyone with a large policy and a taxable estate.

An insurance trust may be either funded or unfunded. An unfunded trust has the policy either fully paid when transferred to the trust, or provisions are made for the future funding of premiums. With a funded trust, the grantor transfers to the trust both the policies and adequate income-producing assets to pay future premiums.