New “Anti-Chawla” Legislation Removes Doubts Over Strategic Use of Life Insurance Trusts

The Life Insurance Trust is a highly strategic tool for removing life insurance from a personís estate, thereby eliminating significant estate taxes. In fact, it is a tool that we employ extensively for our clients. The recent case of Chawla cast a doubt on the viability of such Life Insurance Trusts in Maryland by suggesting that a Life Insurance Trust set up by the insured did not have an "insurable interest" in the insured. (A person must have an "insurable interest" in the insured in order to purchase insurance on his or her life; otherwise the life insurance policy is void as a matter of law.) While Chawla contained egregious facts involving, among other things, a fraudulent life insurance application, there was a perception that using Life Insurance Trusts was risky after Chawla.

The Estates and Trust Council of the Maryland Bar came to the rescue and drafted legislation that essentially overruled Chawla. The legislation, which became effective on June 1, 2006, provides that the trustee of the trust does indeed have an insurable interest in the life of the insured in most family contexts. Thus, we continue to encourage clients to consider the use of Life Insurance Trusts as a fundamental and key strategic planning tool for significant tax savings. The Life Insurance Trust is especially appropriate for clients whose estate exceeds $1,000,000. Click here for a discussion of Insurance Trusts.

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