A trust is a legal agreement where a person hands over his assets to a trustee to manage for the benefit of a purpose or another individual. Having had an idea of what a trust is, it would be easier to understand what trust-owned life insurance is.
What is trust-owned life insurance?
Trust-owned life insurance basically can be said to be a type of life insurance that exists in a trust. Usually, the insured are required to set up a trust and then purchase a policy into it or resettle an already existing insurance policy in the trust.
Most times, high-net-worth individuals use this type of insurance to plan their estate.
Assets that are included within trusted-owned life insurance are usually free of tax. It is important to note that if the insurance was transferred, the policyholder is given a three-year look-back period during which the returns on the insurance become taxable if the insured dies within that three years time frame. It is usually advised that one who has to transfer his existing life insurance into a trust should do so during his early 50s
How trust-owned life insurance works
Just like other insurance policies, you are required to pay a premium periodically after your purchase of a trust-owned life insurance policy.
As already stated above, this type of insurance exists within a trust. Although most people who buy this type of policy are high net worth individuals, anybody who plans to meet their plans for charity, wants to ensure the sharing of there in a particular way amongst their heirs or those who want to cut down the tax rate on their estate, can purchase it.
First, you need to open a trust, Then you buy a policy under the trust or transfer an existing policy after necessary documentation to the trust. Note that your beneficiary can be any one of your choices but when you name your spouse as the beneficiary then, the estate tax is excluded. Also, the estate tax is also excluded if your asset is below the tax exemption value.
It is advised to review your policy term regularly so it may align with the trust’s terms.
If you are unsure of the value of your estate or its future value in relation to the tax exemption value of your state or country then it is advisable to opt for an irrevocable insurance trust and then purchase your life insurance with it.
Advantages of trust-owned life insurance
The advantages of trust-owned life insurance include;
- Your assets are distributed to your beneficiaries without the grueling associated with tax payments. This is because the trustee is now responsible for the profits from the policy holder’s estate.
- If there are any expenses to be made on the estate like estate taxes or purchase assets, this type of insurance has made provisions such that the trust can lend the estate the money it needs
- For individuals that want to give to charity, this type of life insurance enables them to be able to donate to charity organizations while still protecting the interest (inheritance) of their heirs.
Disadvantages of trust-owned insurance
The disadvantages of trust-owned insurance include;
- The policyholder loses control over his policy to the trustee as the policyholder entrusts him the right to distribute his estate.
- Another setback associated with trust-owned life insurance is that if the policy was a policy that existed before the trust but was later transferred to the trust, there is usually a three-year look-back period during which if the policyholder dies, the returns from the insurance become a part of the estate and it becomes taxable.
When buying trust-owned life insurance, contact your estate planner. Organize your estate by naming your spouse as heir. your estate planner buys this insurance on your behalf. What this does is, when you die, the estate receives benefits of the policy which would now be tax-free at the time it’s passed on to your spouse.