How Can Life Insurance Become Credit Protected?
Life Insurance has seemingly become a forefront topic of conversation for
many individuals in light of COVID-19. Life insurance may be protected
by state statute, but its protection depends on state laws.
Click here to find out if Life Insurance is protected in your state. To get protection,
you may title your insurance policy to an
irrevocable life insurance trust (ILIT). An ILIT is an irrevocable trust specifically designed to own life insurance.
As with other trusts, the ILIT has a trustee, beneficiaries, and terms
for distributions. Your ILIT would own your insurance policy and would
be the policy beneficiary. When you die, your insurer pays the ILIT trustee
who then distributes the proceeds to the ILIT beneficiaries. Your estate
shouldn’t be the beneficiary, nor should you retain other incidence
of ownership. This gets the policy out of your personal name and safe
from any personal creditors.
Since the ILIT is irrevocable, it protects the policy’s cash value,
death proceeds and trust distributions. If life insurance isn’t
fully creditor protected under your state laws, then an ILIT is essential.
As importantly, the ILIT can save you estate taxes because the ILIT –
not you personally – owns the life insurance. Therefore, policy
proceeds in the trust are not included in your taxable estate. This is
why you save estate taxes. To illustrate, if you are single and die with
a three-million-dollar estate which includes a one million dollar life
insurance policy, and have a two million dollar death tax exemption; your
estate would pay an estate tax on the one million dollars. If we assume
an estate tax of about 50 percent, your estate taxes would be about $500,000.
An ILIT eliminates the one-million-dollar life insurance proceeds from
your taxable estate. Your estate saves about $500,000 because you reduced
your taxable estate to zero. Also, the ILIT gives you greater control
over policy distributions. For example, if you personally own your insurance,
your insurance will directly go to the named beneficiaries when you die.
An ILIT lets you control
when the policy proceeds are distributed. Spendthrift, anti-alienation, discretionary
distribution and other protective provisions in the trust can further
protect the insurance proceeds from your beneficiaries’ creditors.
Do you have exposed cash that you do not foreseeably need? It may be smart to buy
more life insurance. Of course, not everyone needs more life insurance, but
life insurance may be a simple way to shield excess cash from creditors because
every state at least partially creditor protects life insurance. Moreover, it
can be a tax efficient way to build your estate, a retirement nest egg
or simply a way to leave considerably more money to your beneficiaries.
Finally, we should consider fraudulent transfer law if planning is done
after a creditor threat has already materialized. Some states have adopted
fraudulent conversion laws to specifically address whether transforming
an exempt asset to a non-exempt asset, such as insurance, in order to
avoid creditors is fraudulent. If such a purchase is made after a creditor
threat has arisen, the fraudulent conversion law (if a given state has
such a law) tends to operate differently than fraudulent transfer law.
This means that even if a transfer is not fraudulent under fraudulent
transfer law, it may be fraudulent under fraudulent conversion law. Whether
a transfer is fraudulent will vary from state to state.
Contact The Presser Law Firm. P.A. for a complimentary preliminary consultation.
The Presser Law Firm, P.A.
6199 N. Federal Highway, Boca Raton FL 33487
(561) 953-1050 or e-mail Info@AssetProtectionAttorneys.com