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Your Bank > Education and Advice > CNB University

The Life insurance Trust - Following Through on Your Swing

In golf and tennis, it is important to keep your eye on the ball so you make good contact. However, it is equally important to follow through so the ball goes where you want it to go.

In life insurance planning, like golf and tennis, many people are good at planning what their needs are but neglect following through by thinking about what will happen to their life insurance proceeds when they die. Sometimes those proceeds are mismanaged and go into the rough or off the court. A life insurance trust may help.

A trust may come in handy if your spouse and/or other beneficiaries are not accustomed to managing large sums of money. You are just following through on contingency plans that prompted you to purchase life insurance in the first place.

As the creator of the trust, you choose the trustee - such as our organization - and you name your trustee as the owner and beneficiary of the insurance policies on your life. When you die, your trustee will collect the insurance proceeds, invest them prudently, and make distributions of income and principal to your beneficiaries according to your instructions. The burden of financial management is thus taken from your beneficiaries.

Here's what you can do with a life insurance trust:

  • Set up the investment plan for your insurance proceeds and know that it will be carried out by experienced professionals;
  • Enable your trustee to make special distributions to one of more beneficiaries in the case of an emergency;
  • Instruct your trustee when and to whom distributions should be made;
  • Avoid the complexities of court-appointed guardianship if you name minor children as trust beneficiaries; and
  • Unify your estate plan by having your estate assets "poured over" into your life insurance trust so that all of your assets can be administered by a single trustee.

IRS regulations have clarified the federal estate-tax liability of insurance proceeds. The proceeds will not be subject to estate tax if the trust is irrevocable and if you do not hold any incidents of ownership (generally, the economic benefits of a policy) in the insurance at the time of your death and if you do not transfer any of the incidents of ownership within three years of your death. In an irrevocable life insurance trust, your trustee can purchase and own the policy for you (your connection to the transaction is limited to taking the physical and transferring funds to the trustee). So, your life insurance trust can make certain that your insurance proceeds will remain free of estate taxes.

Note that federal estate taxes are scheduled for repeal in 2010. Until then, however, estate taxes continue to pose a threat to larger estates.

Your individual family circumstances and your estate plans determine whether or not a life insurance trust is appropriate for you. So follow through with your estate planning and contact CNB if you need help in planning a life insurance trust. For further information, please contact Paul Callaway, VP, Business Development Officer, (585)419-0670 ext. 50608 or email pcallaway@cnbank.com