How life insurance can help increase value and allow more assets to pass to heirs

What is a B Trust?
A “B Trust” (or Credit Shelter Trust) is a common estate planning technique describing a trust designed to make maximum use of the estate tax exemption available. It is a trust established at the death of the first spouse funded with the exemption amount allowed under current tax law. A B Trust is typically used as a strategy for clients with primary goals of ultimately passing assets to their children or heirs while allowing the surviving spouse and/or trustee use of the trust income for lifestyle purposes if needed.

See the Advantages of a Leveraged B Trust vs. a Regular B Trust

Although using a B Trust is an effective strategy for clients, it does come with some key disadvantages. Trust assets are subject to various taxes on income the trust receives, there is no step-up in basis at the death of the surviving spouse and assets can be subject to fluctuations in value due to market volatility.  Is there a better way to pass these assets on to the heirs, shut off the tax problem and get a step-up in basis on the assets? All it takes is repositioning of the assets (or part of the assets) into life insurance inside the trust. By doing so, the client can achieve possible benefits such as:

  • Shutting off all taxation as the insurance is a tax deferred asset
  • A step-up in basis at death
  • Significantly more proceeds to the heirs through the leverage of the assets via the insurance death benefit
  • Stability from market fluctuations
  • A guaranteed amount of proceeds at death

Typically, when an advisor shows a high-net-worth client the option of doing nothing and continuing down their same path versus the leveraged B Trust strategy, the answer is obvious. Most affluent clients see the B Trust assets as money for their children because the surviving spouse has plenty of other assets to cover living and lifestyle expenses. This concept can be an ideal solution to maximize what a couple’s heirs receive while providing extra assets if needed to the surviving spouse and minimizing taxes.

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