Irrevocable Life Insurance Trusts: Individual vs. Joint Trusts

An irrevocable life insurance trust with one trustmaker is called and individual trust.  An irrevocable life insurance trust with two or more trustmakers in called a joint trust.

Individual Trusts

Individual trusts are used by unmarried trustmakers who want to avoid federal estate tax on their insurance proceeds.  Because unmarried trustmakers do not have the benefit of the marital deduction, irrevocable life insurance trusts are extremely important if their estate exceeds $5,000,000 in 2011.

Individual irrevocable life insurance trusts are also used by married trustmakers who want to take care of spouses and family members while ensuring that life insurance proceeds escape taxation in their own estates, as well as in their spouse's and family member's estates.

In some cases, two individual irrevocable life insurance trusts are created -- one for the husband and another for the wife.  Each irrevocable life insurance trust owns and is the beneficiary of policies on the life of its trustmaker.  No matter which trustmaker dies first, the proceeds can then be used to care for the surviving spouse, children, and other beneficiaries.  When the second spouse dies, the proceeds will be available to pay federal estate tax and/or meet other planning goals.  Both policies' proceeds will be free from federal estate taxation.

Individual irrevocable life insurance trusts are also used when the trustmaker has existing life insurance policies that he or she would like to transfer to an irrevocable life insurance trust.  Prudent planning often dictates the use of new life policies when an irrevocable life insurance trust is being created.  However, new policies aren't always feasible.  For example, a trustmaker that experiences health problems may find that the premiums required for a new policy are simply too expensive, or even that they are no longer insurable.

Joint Trusts

A joint irrevocable life insurance trust generally owns a second-to-die policy on the lives of both spouses.  This policy pays when the second spouse dies, so it is ideal for when the purpose of the life insurance is primarily to pay estate taxes.

A benefit of this type of policy is that the premium payments are generally lower than they are for two individual policies because premiums are based on the joint actuarial lives of both insured person.  A second benefit is that the proceeds will be available to pay federal estate tax regardless of which spouse dies first.

Individual and family circumstances determine whether an individual irrevocable life insurance trust or a joint irrevocable life insurance trust is better.  A major decision factor will be whether the client wants to use the insurance to benefit a spouse or children, or to pay estate taxes.

*Adapted from the Planning Partners Press.