Frequently Asked Questions Concerning Life Insurance Trusts

Q: What is a life insurance trust?
A: This is a trust set up to own a life insurance policy. It is usually an irrevocable trust. If the insured is not the owner of the policy, the proceeds of the policy will not be subject to estate taxation when the insured dies. Irrevocable life insurance trusts are generally designed to avoid estate taxation of the proceeds of the life insurance policy.

Q: Can the beneficiaries of the life insurance policy be changed?
A: Generally speaking, no. The policies are irrevocable and the beneficiaries cannot be changed once the trust has been set up.

Q: Can the insured borrow against the accumulated assets in a whole life insurance policy?
A: No. The insured cannot borrow against the policy. The insured is not the owner of the policy. The trust is the owner of the policy.

Q: Must the life insurance trust be irrevocable?
A: Yes. The purpose of the life insurance trust is to avoid estate taxation. The Internal Revenue Service requires that these trusts be irrevocable or else they are subject to estate taxation.

Q: Will the premium payments in the life insurance trust be considered part of your estate tax exemption?
A: Generally speaking, the answer is yes. However, you may be able to avoid the premium payments being considered a gift for estate tax purposes. To do this you must set up a Crummy Trust. This will allow you to utilize your annual gift exclusion which is currently $14,000 (hereinafter indexed for inflation) for each individual trust beneficiary.