Twenty years ago, when the exemption from the federal gift and estate tax was “only” $600,000 per taxpayer, estate planners advised nearly all of their clients who owned life insurance policies to implement a life insurance trust to hold such policies. Now that the exemption from such tax has increased nearly 1,000 percent to $5.45 million, and it has become “portable” between spouses, it is significantly less common for clients to need to consider implementing such trusts and they are thus not nearly as ubiquitous as they used to be. In addition, many clients for whom life insurance trusts made sense to only five years ago (when the exemption was scheduled to revert to $1 million per taxpayer) need to consider whether to dismantle trusts that now may seem to be more of a hassle to administer than they appear to be worth.
The term “life insurance trust” is commonly used to refer to an irrevocable trust that is specially designed to take title, as owner, of a life insurance policy during an insured’s lifetime. For Pennsylvania residents, under current law, the only reason to implement a life insurance trust is to prevent the imposition of federal estate tax on the policy proceeds upon the insured’s death (as could be the case for a policy owned by the insured at death). If there is no concern about an estate being subject to federal estate tax, but a trust to receive the life insurance proceeds is desired for other reasons, a trust can be implemented under a will or revocable trust at the time of an insured’s death by properly coordinating the trust provisions under one of such documents with a beneficiary designation form. In such case, there would be no need to transfer ownership of the policy to a life insurance trust during the insured’s lifetime.
