What Is A Life Insurance Trust?

A Life Insurance Trust is an Irrevocable Trust set up for the purpose of owning a life insurance policy. A Life Insurance Trust is more commonly used when the combined assets of a client, including all life insurance, retirement benefits, real estate and other financial assets exceed estate tax exemptions. In the State of New Jersey, the exemption limitation for non-spouses is only $675,000. In New York State, the exemption is $1 million. As such, it is easy to exceed the limit when taking into account all of a client’s assets. A properly drafted Life Insurance Trust will protect life insurance from estate taxation, while keeping the funds available to a client’s heirs as needed. When applying for a new life insurance policy it is important to create the life insurance trust prior to applying for the new policy and have the life insurance trust be the applicant and owner of the policy. Insureds must live 3 years from the date of the transfer to a Life Insurance Trust in order for the proceeds to be excluded from the Insured’s estate for tax purposes.

Life Insurance Trusts typically take advantage of an Estate Planning technique known as “Crummey Powers of Withdrawal”. “Crummey” was the last name of a taxpayer who successfully litigated a case against the Internal Revenue Service many years ago. The Crummey case held that gifts made to a Trust subject to the Trust’s beneficiaries’ power to withdraw a portion of such gifts qualifies as a “present interest” qualifying for the gift tax annual exclusion (now $12,000 per donee).