Insurance Trust
A legal arrangement where life insurance proceeds are held and managed by a trustee for the benefit of designated beneficiaries. This structure helps minimize estate taxes and provides professional management of the insurance benefits.
Example
“Sarah established an insurance trust to ensure her $500,000 life insurance policy would be professionally managed for her children's education expenses.”
Memory Tip
Think 'Trust the Insurance' - you're trusting someone else to handle your insurance money wisely for your loved ones.
Why It Matters
Insurance trusts can significantly reduce estate taxes, potentially saving families thousands of dollars while ensuring professional management of life insurance proceeds. They provide structure and protection for beneficiaries who may not be ready to handle large sums of money responsibly.
Common Misconception
Many people think insurance trusts are only for the wealthy, but they can benefit middle-class families too. Another misconception is that you lose all control over the policy, when in fact you can often retain some influence through the trust structure and trustee selection.
In Practice
John has a $300,000 life insurance policy and establishes an irrevocable life insurance trust (ILIT). He pays the annual $2,400 premium by gifting money to the trust, which then pays the insurer. When John dies, the $300,000 proceeds go to the trust tax-free, and the trustee distributes $50,000 annually to John's spouse for six years, avoiding immediate estate taxes on the full amount and providing steady income.
Etymology
Combines 'insurance' from Latin 'securus' (secure) and 'trust' from Old Norse 'traust' (confidence), reflecting the secure confidence placed in a third party to manage benefits.
Common Misspellings
Compare insurance quotes and save
Related Terms
More in insurance
Other insurance terms you should know
See Also
Need help with spelling?
Instant spelling checker with dialect variants for 2,000+ words.