Life insurance is often a significant part of a comprehensive estate plan. In addition to funding an estate plan, if owned by an irrevocable trust (not an individual), the life insurance has asset protection.
Asset Protection
If the life insurance policys value and proceeds have asset protection, cannot be taken by creditors (i.e. anyone who would sue you or your beneficiaries).
- Term insurance has no value during lifetime, but pays out proceeds at the death of the insured. To protect term insurance, the beneficiary of the insurance must be a trust.
- Whole life insurance has value during lifetime and pays out proceeds at the death of the insured. To protect whole life insurance, both the owner and the beneficiary of the insurance must be a trust.
(In addition, with both term and whole life, the owner of the policy is the life insurance trust. This avoids federal estate and generation skipping taxes.)
Dynasty Trusts
If the life insurance proceeds are thought to last beyond the next generation, often dynasty trust planning is used. A dynasty trust is sited in a state that has abolished the Rule Against Perpetuities, which means that the trust can continue forever; and, assets cant be forced out of the trust by creditors. This means that asset protection (and federal transfer taxes) can last forever.
If life insurance is a part of your estate plan (or should be), consider the benefit of asset protection and having a life insurance trust own your policy. Chat with a qualified estate planning attorney.
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