Life Insurance trusts Are Still A Valuable Asset Protection Tool

Many times a person who is sued owns one or more significant life insurance policies.  If a lawsuit against the insured is successful, the life insurance policies could be subject to the claims of the successful plaintiff. 
One way to protect a valuable life insurance policy from the claims of a creditor is to place the policy into a life insurance trust.  The insured’s spouse and descendants may be beneficiaries of the trust.  During the insured’s lifetime, all of the assets held by the trust, including any life insurance policies, are not subject to the claims of the insured’s creditors. ​

 After the insured’s death, policy proceeds are available to the insured’s spouse and descendants and at the same time are protected from claims against the spouse and descendants.  If transferring the policy to the trust might result in gift tax issues, the trust may be drafted so that the transfer of the policy is not considered a gift.
Life insurance trusts were commonly used to save estate taxes when the federal and state estate tax exemptions were more modest than the current $11,180,000 federal exemption, $5,250,000 New York exemption and $2,600,000 Connecticut exemption.  Less and less people need to form a life insurance trust to keep the insurance death benefit estate tax free.  But a life insurance trust remains a valuable tool for asset protection purposes. 
Another way to protect a life insurance policy is to have the policy owned by and payable to a family limited liability company.  A creditor of an owner of the LLC cannot access the insurance policy.  Instead, the creditor is limited to obtaining a “charging order” against the LLC owner.  The charging order allows the creditor to obtain distributions actually made by the LLC to the LLC owner.  If no distributions are made, the creditor is not entitled to receive any of the life insurance proceeds.