Trusts & Legacy: Protect Your Wealth with Purpose

Trust-Owned Life Insurance (TOLI) is one of the most powerful tools for high-net-worth families and business owners who want to transfer wealth without triggering unnecessary taxes, disputes, or probate.

What Is a Life Insurance Trust?

An Irrevocable Life Insurance Trust (ILIT) is a special-purpose legal structure that owns your life insurance policy. The trust receives the tax-free death benefit, keeping it outside of your taxable estate. It distributes benefits according to your wishes, ensuring privacy, control, and legal protection.

Why Use a Trust?

Avoid Estate Taxes

Keeps large death benefits out of your estate. Helps avoid 40%+ estate tax liability on large policies.

Shield from Creditors

Assets inside the trust are generally protected from lawsuits, divorces, and creditors.

Control Distribution

Set detailed rules: staggered payouts, incentives, age-based access. Avoids lump-sum inheritance mistakes.

Family Privacy

Trusts avoid probate, keeping estate matters out of public record.

Legacy Planning

Supports multi-generational wealth, business continuation, or charitable giving.

Advanced Planning Strategies

Pairs well with SLATs, Dynasty Trusts, Premium Financing, and Survivorship policies.

How Trust-Owned Life Insurance Works

Step 1: Create the Trust

An estate planning attorney drafts the ILIT or SLAT (Spousal Lifetime Access Trust). This trust becomes the owner and beneficiary of your life policy.

Step 2: Fund the Trust

You make annual gifts to the trust, often under your annual gift tax exclusion ($18,000 per person per year in 2024). These gifts are used to pay premiums.

Step 3: Trust Pays Premiums

The trustee (appointed by you) uses the gifted funds to pay life insurance premiums.

Step 4: Policy Grows

Your policy accumulates cash value and provides a guaranteed death benefit (depending on product type).

Step 5: Death Benefit Distribution

When you pass, the tax-free death benefit goes to the trust — and the trustee follows your distribution instructions.

Key Benefits

• 100% Tax-free legacy — no estate tax, no probate
• Trust Control — Privacy + Protection
• Decades of Distribution — Distribute over decades — not a lump sum at once

Pros & Cons

Advantages

• Estate Tax Protection - Keeps the death benefit out of your taxable estate. Helps avoid 40%+ estate tax liability on large policies.
• Control Over Distributions - Set detailed rules: staggered payouts, incentives, age-based access. Avoids lump-sum inheritance mistakes.
• Creditor Protection - Assets in the trust are generally shielded from lawsuits, divorces, and creditors.
• Family Privacy - Trusts avoid probate, keeping estate matters out of public record.
• Legacy Planning - Supports multi-generational wealth, business continuation, or charitable giving.
• Advanced Planning Strategies - Pairs well with SLATs, Dynasty Trusts, Premium Financing, and Survivorship policies.

Considerations

• Irrevocability - Once the trust is created and funded, you can’t change or revoke it. You lose direct control of the policy.
• Gift Tax Complexity - Premiums paid into the trust are considered gifts. Must manage Crummey letters and annual exclusion limits.
• Ongoing Administration - Requires a trustee, annual maintenance, and coordination with your legal/tax team.
• Cannot Access Policy Cash Value (Directly) - You can’t borrow from or surrender the policy personally — only the trust can.
• Funding Needs to Be Planned - If using premium financing or large gifts, you may need to pledge collateral or plan multi-year contributions carefully.

Who Should Consider a Life Insurance Trust?

• Business owners with significant estate tax exposure
• High-net-worth individuals ($5M+ estates)
• Families wanting to control inheritance distribution
• Business owners planning for succession
• Those wanting creditor protection
• Families with complex inheritance needs

Disclaimer

This article is for educational purposes only and does not constitute legal, tax, financial, or investment advice. Consult with licensed estate planning attorneys, tax advisors, and insurance professionals to design a trust strategy that fits your specific circumstances.