A testamentary insurance trust can be an excellent method of transferring assets to a specific beneficiary on death, without going through the testator’s estate. Because the assets will not be part of the estate, they will not be subject to probate fees or estate administration taxes, or available to the estate’s creditors. As well, because probate documents are filed with the Court, they are public documents, while assets can be transferred via an insurance trust with much more privacy.
An insurance trust is generally funded “outside” the estate, with a life insurance policy whose proceeds are payable on the insured’s death, to a trust formed solely for the purpose of receiving such proceeds. The insurance trust document includes terms under which the trust property will be held and administered for the benefit of a specific beneficiary (or beneficiaries), who might not be included in the deceased's Will. The terms are often different than those in the Will.
The proceeds paid into an insurance trust will generally be safe from the estate’s creditors or from people who might contest the Will.
Because the insurance trust will be a testamentary trust (i.e., a trust created on death), income earned within the trust will be taxed at the same graduated rates that apply to individuals, making the insurance trust an effective “vehicle” for tax planning purposes.
Finally, this type of planning permits an immediate tax-free infusion of cash into the trust, since life insurance proceeds are realized on a tax-free basis, even if paid into a testamentary trust for the benefit of some other person.
Some additional reasons for using an insurance trust may include:
Your TSG representative would be happy to discuss the benefits and challenges of an insurance trust with you.
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