When a life insurance policy is held by a trust, the cash value and the proceeds are also protected from potential lawsuits and claims. A portion of family savings can be transferred to the trust each year. That amount can be used to fund a policy. Amounts invested in the policy are permitted by favorable tax laws to accumulate free of income tax. In this manner, large amounts of value can be built up over a period of years
One of the most popular and effective estate planning and asset protection strategies is to use a Life Insurance Trust to hold one or more policies on the life of the insured.
The simple solution is to create an Irrevocable Trust with appropriate language governing the ownership of the policy and the administration and disposition of the proceeds. A properly drawn trust keeps the policy out of your estate-free of estate tax-so that the entire amount of the proceeds are available for your family, if that is a concern. But, in addition, the ILIT protects the policy, its cash value and its death benefits from creditors of the insured, the trustee and the trust beneficiaries.
As an example, a fifty-five-year-old client of ours had a good income and was saving about $30,000 per year. We set up a Life Insurance Trust with a plan to transfer $20,000 per year into the trust to pay the premiums and provide liquidity to the trust. He achieved these significant benefits:
- All amounts transferred into the trust and plan proceeds were fully protected against potential claims and lawsuits.
- Investment earnings grew and compounded without annual income taxes.
- The cash value of the policy could be withdrawn or borrowed for any needs of the trust and possibly, the insured and the trust beneficiaries;
- In this case, policy proceeds of $5 million would be available for his family- free of income and estate taxes-upon the client’s death.
The Life Insurance Trust is an important foundation of any asset protection and estate plan where the value of the estate is likely to exceed the exemption amount. Proper planning in this manner can prevent a significant loss of 50 percent or more of your accumulated wealth from taxes and can protect assets from future claims.
About the Author
D. Steven Yahnian has been a member of the California Bar and a practicing Attorney since 1980. He has also been a California CPA since 1984. Mr. Yahnian also holds the CFP® designation.
Mr. Yahnian practices in the following areas of law through YAHNIAN LAW CORPORATION:
- Estate Planning & Administration
- Asset Protection Planning
- Tax Planning, Tax Debt Resolution and Tax Litigation
- Business & Corporate Law and Planning
- Real Property Law & Planning
As a CPA/CFP, Mr. Yahnian also has a separate accounting and tax return preparation practice called DSA ACCOUNTING.
Mr. Yahnian is a California State Bar Certified Specialist in the following
• Taxation Law and
• Estate Planning, Trust & Probate Law.
Mr. Yahnian received a B.S. degree in Accounting from USC, a J.D. from Loyola University of Los Angeles School of Law and an LL.M. in Taxation from New York University Law School. He also has a Certificate in Taxation from UCLA (with distinction).
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