Listen to Lawrence…Should you transfer your life insurance into your irrevocable trust?
February 3, 2021
I hope you all faired well with our big snowstorm yesterday. I have at least 18 inches of snow on my driveway and I can’t wait to get out there and attack it with my monster snowblower. UGH! To postpone that inevitability, I decided to write this LISTEN TO LAWRENCE entry. By the way, Punxsutawney Phil predicted that we will have 6 more weeks of winter. Damn that groundhog! 😊
Happy Ground Hogs Day!
Your firm created an Irrevocable Trust for my wife and me on 10/03/2019. It was suggested that we transfer our life insurance into the Trust. Does the Trust become the owner of the insurance policy and the Trustee become the beneficiary? How are the premiums paid, for the insurance policy? Upon my death, do the benefits from the policy stay in the trust?
There are several reasons to transfer your current life insurance into an irrevocable trust. The two most common are to remove the value of your life insurance from your taxable estate and to protect the cash value and death benefit from Medicaid.
Life insurance that you own on your life is taxed to your estate upon your death. If your total estate then exceeds the state or federal exemptions, a considerable amount of tax will need to be paid. On the other hand, if you do not own the life insurance on your life, then the insurance will not be taxed. This is why people transfer their policies out of their names, either outright to family members or to irrevocable trusts (to retain more control). To escape estate tax, the transfer must be done more than three years before death.
Life insurance you own on your life is also considered an asset by Medicaid. More specifically, the cash value of your policy is treated like a bank account and counts toward the $15,900 you are allowed to keep. The death benefit is not something counted unless it passes to your spouse who may also be trying to protect assets from Medicaid. This is why people transfer their policies out of their names, either outright or to irrevocable trusts (to retain more control). To protect the cash value from Medicaid, the transfer must wait out the relevant look-back period.
In either case, if the insurance is transferred to an irrevocable trust, the trust will be considered the owner and the trust will be named the beneficiary. Technically, the trustee takes title in the name of the trust and the trustee will be the beneficiary in the name of the trust. Don’t be confused when I say the trustee is the owner and beneficiary because practically speaking, they are not…at least not personally. The trustee holds the asset, not in their personal name but as a fiduciary for the trust. For example, if Richard Nixon wanted to transfer his life insurance to a trust with his daughter, Tricia Nixon as trustee, it would be titled:
Tricia Nixon, as trustee of the Richard Nixon Irrevocable Trust.
When you look at the form provided by the insurance company you can fill it out this way…. but it will work to just say, the Richard Nixon Irrevocable Trust (or by whatever name your trust is called). For the most part, the trustee/trust ownership and trustee/trust beneficiary concepts are interchangeable, but there is a technical difference.
Since the trust will own the policy, the trustee should pay the premiums. If the trust has no money to do so, then you will have to pay it. This may have tax and Medicaid consequences. For more information on these consequences, check in with my next LISTEN TO LAWRENCE email.
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