Estate Planning 101

How to Transfer Key Person Life Insurance Policies into a Trust

Discover the step-by-step process of transferring key person life insurance policies into a trust with our detailed blog post. Learn how to safeguard your business and provide financial stability through this strategic financial planning tool.
February 4, 2024

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Life insurance policies, especially Key Person policies, can be significant assets in estate planning. Transferring such policies into a trust can offer a plethora of benefits, including tax savings and the assurance of a smooth transition of funds upon the insured's death. This blog post will guide you through the process of transferring a Key Person life insurance policy into a trust.

Understanding Key Person Life Insurance Policies

A Key Person life insurance policy is a type of coverage that a business purchases to compensate for financial losses that would arise from the death or extended incapacity of the important individual(s) in the company. The policy's proceeds can help companies weather the transition period by covering lost income or the costs associated with finding and training a replacement.

Benefits of Transferring Key Person Life Insurance into a Trust

Transferring a Key Person life insurance policy into a trust can offer tax advantages, as the proceeds from the life insurance policy may be subject to estate tax if owned by the insured individual. By transferring the policy into a trust, the death benefit can be received tax-free by the trust, protecting these funds from potential estate taxes. Furthermore, it can provide a measure of legal protection and ensure a smoother transition of funds.

Setting Up a Trust for a Key Person Life Insurance Policy

  1. Choose the type of trust: Irrevocable Life Insurance Trust (ILIT) is often used for life insurance policies. Once the policy is in the trust, you, as the grantor, can't make changes without the beneficiary's consent.
  2. Select a trustee: This could be a trusted individual or a financial institution who will manage the trust.
  3. Create the trust document: This legal document lays out the terms of the trust, including the beneficiaries and the management of the trust assets.
  4. Fund the trust: This involves transferring the life insurance policy into the trust.

Process of Transferring a Key Person Life Insurance Policy into a Trust

  1. Evaluate the policy: Review the terms of the policy and ensure it can be transferred into a trust.
  2. Change policy ownership: Contact your insurance company and complete the necessary paperwork to transfer the policy ownership to the trust.
  3. Change the policy beneficiary: The trust should be named as the beneficiary of the policy.
  4. Document the transfer: Keep a record of the transfer, including communication with the insurance company.

Seeking Professional Assistance

Given the complexity of the process and potential tax and legal implications, it's advised to consult with a financial advisor or attorney experienced in estate planning. They can guide you through the process, help you understand the potential implications, and ensure that the transfer is done correctly.

Conclusion

Transferring a Key Person life insurance policy into a trust can be a strategic move to protect the financial stability of a business while providing tax advantages. With careful planning and professional guidance, this complex process can be navigated smoothly, ensuring your business is prepared for the future.