Q: Why would I want my trust to own a life insurance policy?
A: If your trust owns a life insurance policy, then you can remove the policy’s benefits that are paid upon your death from federal estate tax. If you own life insurance on your own life (the usual case), the death benefits paid at your death are subject to federal estate tax. Not so if the same policy is owned by a properly structured trust.
Q: Why would I care that my life insurance death benefits are subject to federal estate tax?
A: If the total amount of your assets, including the amount of life insurance payable to your beneficiaries at your death, is less than $1,000,000, you probably don’t. But if that total is more than $1,000,000, then it is possible that, beginning in 2013, the excess of the amount over $1,000,000 may eventually be subject to a 50 percent federal estate tax.
Q: How would I arrange for my trust to own a life insurance policy?
A: You would establish a trust and choose the trustee who would manage any assets in the trust. The trustee can’t be you, but you could name your spouse, adult children or almost anyone else. Your trustee would then apply for a life insurance policy on your life, and when the policy is issued, you would give the trustee the money to pay the annual premiums each year. At your death, the life insurance death benefits would be paid to the trust, and the trustee would either distribute them to your selected beneficiaries, or continue to hold the proceeds according to your directions. If, for example, your children are beneficiaries, but are minors at your death, you may want the money to be held in the trust for them until they are adults.
Q: Is having a trust own an insurance policy new?
A: No. However, if your trust had owned an insurance policy on your life before March 22, 2012, the trustee you named to take care of the policy might have had to fulfill many duties to comply with Ohio law beyond the simple necessary duties of paying the premiums when you gave the trustee the money, and collecting the death benefits when the time came. Some of these potential extra duties under Ohio law before March 22, 2012, included requirements to 1) constantly monitor the insurance company issuing the policy to be sure it remained financially stable enough to pay benefits at your death; 2) determine whether the policy in the trust should be exchanged for a new policy that might offer the same death benefit at a lower cost; and 3) monitor the health of the insured and make any necessary changes in the insurance policy based on sudden declines or improvements. The old law also provided for potential trustee liability if the trustee failed to “diversify” by not including non-life insurance assets as trust investments.
Q: How has the law changed?
A: Ohio law now relieves your trustee, the lawyer who drafted your trust, and your insurance agent from any liability to anyone for failure to perform any of the above additional duties, unless you have specifically included them in your trust.
Q: What is the effect of this change?
A: By eliminating this liability, the trustee you name to handle your trust life insurance policy would not be subject to being sued for not performing duties that you never intended the trustee to perform in the first place. Most trustees were not even aware that Ohio law may have imposed such duties.
Q: Does this new law apply to both old and new trusts?
A: Yes. The new law applies retroactively to all existing trusts, as well as to all new trusts.
Q: What if I want my trustee to perform some of these extra duties?
A: All you have to do is include that specific language in your trust agreement and make sure your trustee understands what is required.
This “Law You Can Use” column was provided by the Ohio State Bar Association. It was prepared by attorney Robert B. Barnett Jr. of the Columbus firm, Carlile Patchen & Murphy LLP.