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Life Insurance Trusts

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History of Life Insurance

In the old days, if you purchased life insurance on yourself and continued to pay the premiums on the policy, even if the policy were to be distributed to someone else, the proceeds of the policy would be included in your estate for tax purposes at your death.

§2042

In 1954, Congress eliminated this problem by enacting §2042 of the Internal Revenue Code. This section basically says that the proceeds will only be included in your estate at death if you maintain an incident of ownership over the policy.

§2042 – What it means

Treasury regulations say that you have an incident of ownership if you gain a personal benefit from the policy, if you have the power to change the beneficial ownership in the policy or its proceeds, or if you have the power to change the time or manner of enjoyment, even if you have no interest in it.

§2042 – Summary

In summary, if you purchase an insurance policy, you can prevent it from being included in your estate for tax purposes if you:

  • don’t have a beneficial interest in the policy;
  • are not the source of any premium payments;
  • and are not the owner of the policy

As a result, estate planners had to develop effective ways of planning for insurance policies.

Life Insurance Trusts

  • If a life insurance trust is properly drafted, it can avoid inclusion of the life insurance policy in the estate of the decedent. Your attorney would create in irrevocable trust and place your policies into it.
  • Placing your insurance policies into a trust is an easy way to meet the requirements of §2042

Non-tax Advantages

  • Life Insurance Trusts provide professional management of your money.
  • They provide the flexibility to meet the special needs of family members.
  • They make it more certain the money will be used in the manner that the insured feels is appropriate.
  • They provide protection against the beneficiaries’ creditors.
  • They make funds available to your estate quicker because they avoid the probate process.

Conclusion

  • By following these guidelines, you can transfer and purchase multiple life insurance policies, place them in trust, and the policies should pass completely outside of your estate at death.

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