The only disadvantage of a life insurance trust is that you cannot personally own the policy. If you want the tax advantages of a life insurance trust, you cannot have any “incidents of ownership” of the policy. The tax laws define “incidents of ownership” as:

1. the right to have the proceeds made payable to your estate;

2. the power to change the beneficiary;

3. the power to surrender or cancel the policy;

4. the power to assign the policy;

5. the power to revoke an assignment;

6. the power to pledge the policy for a loan;

7. the power to borrow against the surrender value of the policy;

8. the power to veto a change in beneficiary or an assignment or cancellation of the policy; or

9. the existence of a reversionary interest in the policy or its proceeds that immediately before death exceeds 5 percent of the value of the policy.

Because the life insurance trust will own the policy, all of these rights and powers will be owned by the trust itself and controlled by the trustee you have selected, instead of you. Because of this, the proceeds will not be included in your estate for tax purposes.

However, although you do not own the policy, the proceeds will still be distributed as you wish. When the trust is established, you will state in the trust how the proceeds are to be distributed when they are received after your death. The trustee you select must follow these instructions. According to your desires, the trustee can use the proceeds to purchase assets from your living trust to provide cash to pay taxes. Alternatively, the trustee can be directed to hold the funds and disburse them to the beneficiaries you have selected for their support. (In contrast, if your children are the direct beneficiaries of your insurance, you cannot control how they use the proceeds.)

Although you do lose some rights in the policy, if the trust is properly drafted according to your desires, such loss is far outweighed by the tremendous tax savings.