Trust Owned Life Insurance- How to Effectively Use Insurance For Estate Planning

Many high net-worth individuals often wonder what the best way is to create a seamless estate plan, and though there are many options, trust-owned life insurance (TOLI) has been proven to be very beneficial, as it enables the trust to provide for the beneficiaries by balancing inheritances among the heirs estate tax-free, which poses as one of the top issues among wealthy individuals. This strategy also is beneficial for individuals who desire to give to charity upon passing. The trust-owned life insurance strategy works well for those of high-net worth, those who have illiquid assets, such as businesses or qualified plans, and those who live in states with large state death taxes.


How it works:

When an individual purchases a life insurance policy, often times, it is the most beneficial to have them owned by their Irrevocable Life Insurance Trust (ILIT). An ILIT is an irrevocable trust designed to own life insurance where the death benefit is taken out of the grantor’s estate. The trustee of their trust then maintains the policies, which allows families to achieve a variety of important tax planning and charitable giving opportunities. At death, the death benefit proceeds will be paid to the designated beneficiaries of the trust income and estate tax -free, as the trust is no longer owned by the estate. The premiums are typically funded by annual exclusion gifts but can be done using private financing or premium financing.

Advantages of Trust Owned Life Insurance:

 By having one’s life insurance owned by their ILIT, a high net-worth individual is able to take advantage of many benefits. By utilizing this strategy, it allows assets owned by the trust to pass to the beneficiaries according to the grantor’s wishes without being subject to the federal estate taxes. This is possible because the owner is the trust, which now removes the proceeds from the insured’s estate. It also allows for the proceeds to provide liquidity to help the estate pay expenses and taxes once the grantor passes away. This liquidity opportunity is available due to a provision which allows the trust the discretion to purchase assets from either spouse’s estate, or to make loans to either estate, which keeps cash available for estate liquidity purchases.

 Additionally, an ILIT gives an individual the opportunity to provide for a charity while preserving an inheritance for their chosen beneficiaries. The ILIT provides a death benefit that replaces the value of the gift made to charity. Furthermore, the gifts that are made to the ILIT will reduce the overall value of the estate, which will in turn reduce the amount that would be calculated in the taxable amount.


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