Life Settlements and Trusts

Life settlements can produce substantial benefits to insureds and estates even when the life insurance policies are held in trusts, including Irrevocable Life Insurance Trusts (ILIT).

As estate planning became more sophisticated, high net worth individuals and families turned to trusts. These trusts are designed to hold a number of different assets, including life insurance policies. Typically the life insurance policies are dedicated to minimizing estate taxes, but they too are eligible to reap the rewards of life settlements. Some life settlement providers anecdotally claim that a majority the life insurance policies they buy are held by trusts. They go onto report that of those, most are Irrevocable Life Insurance Trusts (ILIT's).

What type of trusts can benefit from life settlements?
Not all trusts are created equal, but life settlements can usually occur in any type of trust holding a life insurance policy. The state where the trust is domiciled is the state that has regulatory and statutory jurisdiction over the life settlement transaction.

Examples of the trust types that hold life insurance policies and can benefit from a life settlement:

  • Life Insurance Trust, including Irrevocable Life Insurance Trusts (ILIT)
  • Family Trust
  • Charitable Remainder Trust
  • Any other type of trust vehicle

Why do a life settlement in a trust?
Life insurance policies sold through a life settlement can generously benefit a trust. The reasons to sell a policy held in a trust are numerous, but some of the more common reasons are:

  • The life insurance is no longer in line with the goals of the trust
  • Insured has outlived their heirs
  • The trustee is no longer interested in paying the policy premiums or they have become unaffordable
  • The life insurance policy isn't performing to expectations and life settlement proceeds can be used to purchase a replacement policy
  • The estate size has decreased reducing the amount of insurance required to pay projected estate taxes
  • A policy in the trust may lapse sooner than expected and needs to be replaced with new insurance

What would a trust do with the life settlement proceeds?
No matter why a trust sells a life insurance policy, they will have a large sum of money at their disposal. Trusts often use the life insurance settlement proceeds in the following ways:

  • Fund other investments to achieve trust goals
  • Purchase a new paid up life insurance policy
  • Pay for assisted living or long-term care for the trust beneficiary
  • Fulfill charitable giving plans and donate funds to charities
  • Disburse money to accomplish other goals of the trust