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 how and 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