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Asset Protection, Life Insurance, Cash Value Policy, Bankruptcy

Using life insurance as an asset protection strategy

Asset Protection and Life Insurance Proceeds bring up some very interesting topics. Many clients believe that because they have a life insurance policy, the cash value of that policy will not be subject to creditors during bankruptcy. While some states do offer protection of these assets, many do not. If you would like to learn how to protect these assets as well as protect the beneficiaries of the policy from creditors, the following article will provide important information.

Asset Protection and Life Insurance Proceeds

What happens to the proceeds of a life insurance policy not protected by an irrevocable trust?

When it comes to life insurance policies, many clients will name their children as the beneficiaries of the policy. Very few will question what will happen if the children become candidates for bankruptcy or have significant creditors. If Mom and Dad die and leave the children with $150,000-$300,000 in tax-free death benefit proceeds without the protection of an irrevocable trust, will these proceeds be safe from their creditors or a bankruptcy? Creditors will want the beneficiaries to use the proceeds to pay off the debts they owe.
Section 522(d)(11)(C) of the current bankruptcy code states that a payment that is under a life insurance contract that insures an individual of whom the debtor was a dependent on could be exempt to a reasonable extent for the support of the debtor and any other dependents the debtor may have. In order for this exemption to be applicable, the debtor must have been a dependent of the individual who is insured at the time of the insured's death.
What would happen if the child was not a dependant? In this case, the proceeds from the insurance would be subject to seizure. This would reflect poor planning and shows why clients should use the UltraTrust® Irrevocable Trust or an Irrevocable Life Insurance Trust (ILIT) for any insurance policy that will eventually be paid out to any heirs. When life insurance policy proceeds are paid to an UltraTrust® Irrevocable Trust or an ILIT (Irrevocable Life Insurance Trust), there will be terms that can prevent the trust from giving any money to the beneficiary if the money is going to be used to pay a creditor, including the IRS.
There are some states in which a cash value policy is already protected from creditors. This occurs in Texas, Florida and Oklahoma, as well as a few other states.

Some States Allow the Cash Value Policy to Protect Assets from Creditors

There are some states in which a cash value policy is already protected from creditors. This occurs in Texas, Florida and Oklahoma, as well as a few other states.
Just as there are some states that will offer some protection of assets, many do not offer this critical protection. This means that is a client is funding thousands of dollars into building a life insurance policy to build a retirement vehicle; the cash in the policy will be subject to loss if creditors seek payment or at the time of death with the estate tax. Without question, an insurance policy should be held within a well drafted Irrevocable Trust like the Ultra Trust®.
Many insurance agents like to use cash value life as a way to help their clients build wealth for retirement, so this is troubling if not done properly. It is even more troubling if the wealth building is being done through Equity Harvesting.
Learning how to protect life insurance policies from creditors during bankruptcy is something every client should be aware of to ensure that some of their assets are in fact protected. Even if your state does not offer protection for these assets, you can use a simple Irrevocable Trust structure to accomplish the same protection. Call Estate Street Partners toll-free at (888) 93-ULTRA or (888) 938-5872 or if you are within the Boston, MA region please call us at (508) 429-0011.
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