Benefits of Holding Policy Assets in Trust
There are two main ways to hold policies in an insurance trust. One is for the trust settlor to transfer ownership of the policy to the trust. The second is for the trust settlor to purchase a new policy through the trust. In addition to these two methods, there is another way to utilize a trust to hold policy assets: making the policy part of the assets of a family trust. In this situation, the policy is not the only asset of the family trust, it may also contain other assets such as stocks, investment portfolios, cash, real estate, etc. Although the policy is only part of the trust assets, as the policyholder and beneficiary, the family trust can still enjoy the returns and rights of the policy.
Trusts and life insurance policies have different pros and cons as two different financial instruments, but when combined by using a trust to hold policy assets, they can complement each other with the following five major benefits:
- Convenient Management: Using a trust to hold policies makes it easier to manage policies. The trustee can communicate with the insurance company on behalf of the trust beneficiaries to ensure proper maintenance and management of the policies, reducing the burden on the beneficiaries so they don’t have to personally handle tedious insurance matters.
- Wealth Planning: Make full use of the high death benefit payout function of large life insurance policies so that the trust can obtain a large payout from the insurance company in the event of an unpredictable death risk of the insured, achieving wealth preservation and transfer.
- Asset Isolation: When the policyholder is a trust, the policy does not belong to the personal assets of the trust settlor. At the same time, the trust assets do not belong to the personal assets of the beneficiaries before they are distributed to the beneficiaries.
- Property Distribution: After the insurance proceeds are injected into the trust, the trustee will flexibly distribute the property with reference to the settlor's letter of wishes, effectively avoiding the one-time squandering of funds by inheritance and also protecting the economic sources of minor children who lack sufficient wealth management capabilities.
- Privacy Protection: Since the policy is held in the name of the trust by the trustee, and the trust is the beneficiary of the policy, the identities of the trust settlor and ultimate beneficiaries of the insurance proceeds are kept confidential.
No matter if an insurance trust or family trust is used to hold policy assets, the above five benefits can be achieved. Everyone needs to carefully consider their financial situation, family situation, and wealth planning goals to choose the appropriate trust type.