Term Paper: Combining Life Insure With Trusts

Pages: 8 (2601 words)  ·  Bibliography Sources: 1+  ·  Level: College Senior  ·  Topic: Economics  ·  Buy This Paper


[. . .] As a result of this, the investment remains tax free. [Unit trust center 2003].

6. Purpose (objectives) of trusts

Trusts are set up for the accomplishment of a purpose such as the protection of one's family in the event of death, education of a young child who may be orphaned on the death of his guardian and many other purposes.

Some trusts can be set up for a specific purpose such as funding medical research or saving old historical buildings, which are in the danger of being lost forever. The trust set up for such purposes will try to collect suitable properties which can be used to set up the trusts and then use the accumulated capital to take measures for the accomplishment of its stated objectives which in this example may be funding university research or acquiring old historical buildings and renovating them. [Trusts & trustees 2003].

7. Life insurance trusts

Life insurance although similar to the trust has many different aspects. The most prominent being the investment in a life insurance rests on the life of the investor. There are multitude of life insurance trusts that are available for the investors to choose from which is perhaps the reason why they are preferred by investors. Some of the types of insurance trusts include term insurance, universal life insurance, lifetime insurance, split dollar etc. The investor can choose a combination or customize it according to his/her need and the value the investor is willing to put into the trust. For example the split dollar insurance offers a portion of the cost to be paid by a business entity while the other portion is shred by the investor himself.

The reason why any business would attempt to share such an insurance scheme is that it enables it to protect the funds from the business tax free as it comes under the category of employee insurance. This portion may in turn earn premiums, although shared with the individual but nevertheless earns them significant profits as well. The beneficiary can therefore become insured by paying only half or a significant portion of the insurance trust and yet enjoy the benefit of long-term benefits. The insurance trust also allows the investor to buy and sell whenever, the employee that he wants to discontinue the trust funding. However, most employees are interested in the irrevocable life insurance trust because it allows the individual the benefit of lifetime insurance with minimal fund required for investment while the rest of the fund is taken up by the corporation in which the employee works. On top of that the proceeds from the trust can be used to buy property and estates that becomes tax free as the income that comes from the trust is tax free. These policies make insurance trust perhaps the most preferable to the investors.

Another benefit that one can wield from insurance trust is the fact that upon the death of a spouse, the assets can be passed onto the beneficiaries such as children or someone entrusted by the beneficiary during his lifetime. The value of the trust remains the same while the proceeds can be distributed or re-invested. This method therefore elevates the value of the trust even more for the ultimate beneficiary. [CFFP 2003].


Some of the advantages for this type of trust include:

a) If one dies more than three years after the creation of the trust and it's funding, the assets in the trust are excluded from your estate.

A b) The trust will provide liquidity to help pay the estate taxes and administration expenses that may be payable on your other assets." [CFFP 2003].


On the other hand the trust is disadvantageous for the ultimate beneficiary who makes provisions for the ownership of the trust. These provisions remain unchanged despite the event resulting in the death of the original beneficiary. Thus, the beneficiary provisions must be carefully drafted as these are legally binding and remain unchanged for the next generation beneficiaries CFFP 2003].

8. Trusts citing case law

Trusts due to the controversial nature of their investment have often been subjected to legal intervention. For example in AGO 2001-31, the owner of a property was to receive a homestead exemption through the trust policy. He included a non-spouse as its co-owner which the Attorney General considers changes the value of the property therefore, the homestead was reassessed. This rationale stemmed from the fact that "neither Section 4- of Article VII of the Florida Constitution nor Florida Statutes Section 193.155(3) provides for a partial reassessment of the property. [Find law 2003].

A i). An example of where trusts were used and were beneficial

Examples of the beneficial uses of trust are many, but are mostly for charity and the public good. Trusts for the welfare orphan, trusts for hospitals, trust for education is all examples of beneficial uses of trusts.

A ii). An example of where trusts were not used and should have been Abusive trusts are those trusts, which are of doubtful legality and use "loopholes" in the tax laws to generate higher returns.

Examples are:

Business trusts that attempt to reduce or eliminate self-employment taxes.

Family residence trusts that use depreciation for personal residence and furnishings. [Ernst & Young 2003].


In this article different aspects of trusts were looked at. The combination of life insurance and trust can be an important instrument in providing the required benefit at a better level for a family in the event of the death of the breadwinner. All forms of trusts should be looked at carefully to determine if they can accomplish the objective of the trustor and the legal implications should be thoroughly discussed.


Trust and trustees. 2003. Introduction to trusts. Referenced: November 19, 2003. Web site: http://www.trusts-and-trustees.com/main.htm

William G. Kistner, Healthcare and Financial Management. July 1998. Life insurance trusts can save estate taxes. Referenced: November 19, 2003. Web site: http://www.findarticles.com/cf_0/m3257/n7_v52/21045779/p1/article.jhtml

1040 accountant.com. Types of trusts. 2003. Referenced: November 19, 2003. Web site: http://www.1041accountant.com/types-of-trusts.htm

College for financial planning (CFFP). 2003. Life Insurance Trusts: A way to save taxes and exert control. 2003. Referenced: November 20, 2003. Web site: http://www.insweb.com/learningcenter/articles/life-estate.htm

Find law. 2003, Examples of cases on trusts. 2003. Referenced: November 20, 2003. Web site: http://www.findlaw.com/01topics/31probate/

Ernest & Young. 2003. Avoid Abusive Trusts. 2003. Referenced: November 20, 2003. Web site: http://www.owners.com/Services/Centers/MoneyAndCredit/mcc_ifp_AbusiveTrusts.asp

Unit trusts center. 2003. Unit funds, 2003. Referenced: November 18, 2003. Web site: http://sg.utc.yahoo.com [END OF PREVIEW]

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