Trust Estate Planning With Life Insurance

12 Mar
Life insurance is a valuable estate planning tool because it allows you to leave potentially a large sum of money to your heirs  in addition to any other assets you may leave. Life insurance however is considered part of one’s  gross estate at death. Therefore it is included when calculating estate taxes. How does trust estate planning work in the context of life insurance?
One useful technique is an irrevocable life insurance trust. When the policy is held in an irrevocable trust, it is NOT included in the gross estate. Thus, there is no tax on the value of the policy at death. The only problem is irrevocable means irrevocable. With very minor exceptions you cannot change it once created.  
For those who are not comfortable with an irrevocable trust, we recommend creating a revocable living trust to compliment the objectives of a life policy. For example, assume husband and wife purchase a life policy making the husband the insured. Rather than designating the wife and children as the primary and contingent beneficiaries respectively, we can draft a husband-wife revocable living trust (an A-B trust) and designate the trust as the beneficiary of the life policy. The trust document specifies the husband and wife as the co-trustees/beneficiaries during their lifetimes and the children as the successor beneficiaries. Why bother to do this? Here are (4) good reasons:
1. Upon the death of the named insured (husband/insured in this example), the policy death benefits ( as with any other assets distributed through the trust) are divided into two trusts known as the A-B trusts. At death the decedent’s share is allocated to the “B” trust and the surviving spouse’s share is allocated to the “A” trust. The surviving spouse can draw income and even principal from the “B” trust for “necessaries” of life. But upon her death, the remaining money in the “B” trust is NOT included in her estate for tax purposes. Thus we have effectivley removed at least one half of the insurance proceeds from being taxed when distributed to the children. Had we not used the A-B trust format, the entire amount would have been subject to estate tax;
2. Another reason is that the “B” trust is immune from judgment creditor claims that may arise later against the surviving spouse.So in this sense, we have created a degree of asset protection; 
3. If the  surviving wife were to remarry and later divorce, the “B” trust would not be subject to division by a court upon divorce; and
4. Perhaps most importantly, if there are minor children in the family at the time of death, by having named an adult trustee who is responsible for managing and investing the insurance proceeds for the benefit of the minor children, we have created some sense of  stability and accountability for the children.
In sum, through the use of life insurance and a revocable living trust additional estate planning objectives can be achieved.
Stephen J. Gross is an attorney in West Los Angeles whose practice includes business and real estate law, LLC and corporate formation, preparation of wills, living trusts, and related estate documents, debtor-creditor judgment enforcement issues, shareholder and partnership dispute cases, and asset protection planning. A free 30 minute phone consultation is available to PagesLA readers. To learn more about our law office please visit

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