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Robert J. Mintz
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Life Insurance Trust

One of the most popular and effective estate planning and asset protection strategies is to use a Life Insurance Trust to hold one or more policies on the life of either parent.

An important purpose of this trust is to exclude the proceeds of a policy from estate tax. Simply put, if you own an insurance policy on your life, the proceeds are subject to estate tax. If your total property exceeds the exemption amount, 50 percent or more of the policy proceeds can be lost to estate taxes. If you have $1 million of assets beyond the exemption amount and an insurance policy for $1 million, you would pay approximately $500,000 in estate taxes just on the policy proceeds. Read more in our article “How to Avoid Common Pitfalls When Buying Life Insurance” .

The simple solution is to create a Family Savings Trust with appropriate language governing the ownership of the policy and the administration and disposition of the proceeds. A properly drawn trust keeps the policy out of your estate—free of estate tax—so that the entire amount of the proceeds are available for your family.

When a policy is held by the trust, the cash value and the proceeds are also protected from potential lawsuits and claims. A portion of family savings can be transferred to the trust each year and that amount can be used to fund a policy. Amounts invested in the policy are permitted by favorable tax laws to accumulate free of income tax. In this manner, large amounts of value can be built up over a period of years.

As an example, a forty-five-year-old client of ours had a good income and was saving about $50,000 per year. We set up a Life Insurance Trust with a plan to transfer $20,000 per year into the trust. He achieved these significant benefits:

  • All amounts transferred into the trust and plan proceeds were fully protected against potential claims and lawsuits.
  • Investment earnings grew and compounded without annual income taxes.
  • The cash value of the policy could be withdrawn or borrowed for any needs of the trust.
  • Plan proceeds of $5 million would be available for his family— free of income and estate taxes—upon the client’s death.

The Life Insurance Trust is an important foundation of any asset protection and estate plan where the value of the estate is likely to exceed the exemption amount. Proper planning in this manner can prevent a significant loss of 50 percent or more of your accumulated wealth from taxes and can protect assets from future claims.

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