Estate Planning 101

How to Transfer Survivorship Life Insurance Policies into a Trust

Navigate the complexities of securing your survivorship life insurance policies by transferring them into a trust with our detailed blog post. Learn the step-by-step process, the benefits involved, and the potential pitfalls to avoid, ensuring your financial assets are well-protected for future generations.
February 4, 2024

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Survivorship life insurance, also known as second-to-die insurance, is a unique policy that covers two lives, typically spouses, and pays a death benefit only after the second person passes away. Transferring such a policy into a trust, specifically an irrevocable life insurance trust (ILIT), can potentially offer substantial estate tax benefits and ensure that the insurance proceeds are used according to your wishes. Here's how to go about it.

Understanding Survivorship Life Insurance

Survivorship life insurance is different from traditional life insurance in that it covers two lives and only pays out after both insured individuals have passed away. This type of policy is often used when there is a need to provide for heirs or pay estate taxes.

Benefits of Transferring Survivorship Life Insurance into a Trust

Transferring a survivorship life insurance policy into an ILIT removes the policy from your taxable estate, therefore reducing the amount of estate tax your beneficiaries may have to pay. It also gives you control over how the insurance proceeds will be used after your death.

Setting Up an ILIT for Survivorship Life Insurance

  1. Choose the type of trust: An ILIT is typically the trust of choice for transferring life insurance policies. It's irrevocable, meaning that once set up, it cannot be changed without the consent of the beneficiaries.
  2. Select a trustee: This person will manage the trust and has the responsibility to carry out your wishes as outlined in the trust document.
  3. Create the trust document: This legal document spells out all the terms of the trust, including the beneficiaries, the trustee's responsibilities, and how the insurance proceeds should be distributed.
  4. Fund the trust: This is where you transfer ownership of the life insurance policy to the trust.

Process of Transferring a Survivorship Life Insurance into a Trust

  1. Assign the trust as the policy owner: Contact your insurance company and request a change of ownership form. Complete the form, listing the ILIT as the new owner of the policy.
  2. Change the policy's beneficiary: Again, you'll need to contact your insurance company and change the beneficiary to the ILIT.
  3. Annual gifting: To pay the policy premiums, you can make annual gifts to the trust. These gifts can qualify for the annual gift tax exclusion, further reducing your taxable estate.
  4. Document the transfer: Keep records of every transaction and correspondence with the insurance company and the trustee.

Professional Help is Recommended

Given the complexities involved in setting up an ILIT and transferring a survivorship life insurance policy into it, it is advisable to consult with an experienced estate planning attorney. They can guide you through the process, ensure all legal requirements are met, and help you design a trust that meets your specific needs and goals.

Conclusion

While transferring a survivorship life insurance policy into a trust involves some complexities, with careful planning and the right professional help, it can be a powerful tool in your estate planning arsenal. It not only provides potential estate tax benefits but also ensures that the insurance proceeds will be used according to your wishes.