When thinking of trusts, many assume they are reserved only for wealthy families with significant assets such as properties, investment portfolios, or company shares. However, one of the most versatile and widely applicable structures is the life insurance trust, which can be effective even for individuals without substantial equity holdings.
A life insurance trust is a legal arrangement in which the trust owns a life insurance policy and manages the proceeds for the benefit of designated beneficiaries. This ensures that upon the passing of the insured, the death benefit is paid directly into the trust and distributed according to pre-determined instructions.
Why consider a life insurance trust?
- Estate tax efficiency - Life insurance proceeds are usually excluded from the settlor’s taxable estate, reducing the overall estate tax burden, especially for larger estates.
- Asset protection - Trust assets are shielded from creditors and claims. This structure can also protect vulnerable or minor beneficiaries from accessing large sums prematurely.
- Control and privacy - The settlor may set detailed rules on how and when funds are released, whether in lump sums, milestone-based payouts, or staggered disbursements. Importantly, the trust bypasses probate, ensuring privacy and efficiency in distribution.
- Liquidity for immediate needs - Life insurance trust proceeds can provide beneficiaries with readily available funds for urgent expenses such as funeral costs and daily living, helping them navigate the difficult period immediately after a loved one’s passing.
Types of life insurance trusts
- Irrevocable Life Insurance Trust (ILIT) - An ILIT is the most common structure and removes the life insurance policy from the settlor’s estate. This means the proceeds are not subject to estate tax, providing significant tax savings for larger estates. It also offers strong asset protection, ensuring funds are safeguarded from creditors. However, once established, the trust cannot be changed, so it requires careful planning.
- Revocable Life Insurance Trust - A revocable trust offers greater flexibility, as the settlor can amend or revoke it during their lifetime. While this allows for adjustments if circumstances change, the policy remains part of the estate and does not provide the same tax or asset protection benefits as an ILIT. It is, however, useful for simplifying administration and avoiding probate.
Practical applications
- Providing for minor children or dependants with special needs
- Staggering access to wealth across generations
- Supporting family members with a controlled and structured distribution of funds
- Preserving privacy and ensuring smooth administration of proceeds
How it works
The settlor establishes the trust and transfers ownership of the life insurance policy to the trustee. Upon the settlor’s passing, the insurance company pays the death benefit directly to the trust. The trustee then manages and distributes the funds according to the terms of the trust, providing clarity, control, and security to the beneficiaries.
Alpadis’ role
At Alpadis, we work with families across jurisdictions to structure tailored estate planning solutions, including life insurance trusts. Our experienced team advises on the most suitable trust arrangements to ensure that proceeds are efficiently managed, protected, and aligned with long-term family objectives.
