Why would you put life insurance in a trust?

Placing life insurance in a trust by One Pacific Trust, mainly an irrevocable life insurance trust, can have a number of strategic advantages in estate planning and financial protection.

First, placing life insurance in a trust can help minimize estate taxes. Ordinarily, life insurance proceeds are brought into the policyholder's taxable estate. By transferring ownership of the policy to the trust, however, those proceeds can be kept out of the taxable estate, thereby hopefully reducing the overall estate tax liability. This is especially useful for people with large estates where the estate taxes drastically eat into the value that accrues to the beneficiaries.

Another reason is distribution control: it offers the means by which the policyholder can have the life insurance proceeds distributed to beneficiaries in whatever way he might see fit, and particularly either when or how. This is useful in the case where the beneficiary is a minor, unqualified financially, or when the policyholder would want to make sure that over time, the funds are used responsibly. The trustee controls the assets of the trust according to the terms of the trust, therefore offering greater accountability.

More importantly, placing life insurance in a trust can even offer protection against creditors. In some cases, such proceeds held within a trust may be immune from the creditors of both the policyholder and the beneficiaries, thereby ensuring another extra layer of security regarding one's finances.

Third and final, an insurance trust can enable the provision of specific family needs-such as taking care of a spouse or financing the education of children or grandchildren. This enables more formalized planning to ensure that life insurance proceeds are used in the manner that the policyholder intends.

In general, placing life insurance in a trust is considered one of the most powerful estate planning tools available, offering tax reduction and asset protection.