Trust-Owned Life Insurance (TOLI)

What Is Trust-Owned Life Insurance (TOLI)?

The term trust-owned life insurance (TOLI) refers to a type of life insurance policy that resides within a trust. Policyholders are required to establish a trust, then take out a policy or transfer an existing one to the trust. Premiums are made to the policy as with any other insurance product. This kind of insurance is commonly used as an estate planning tool, particularly by high-net-worth individuals (HNWIs). Individuals primarily use TOLIs as a way to avoid paying estate taxes.

Key Takeaways

  • Trust-owned life insurance is a type of life insurance housed inside a trust. 
  • TOLI is commonly used by individuals as a tool for estate planning purposes.
  • The assets bequeathed to beneficiaries that are housed within the trust can sidestep onerous tax obligations.
  • TOLI policies demand regular reviews to make sure they adequately meet the current needs of the trust.
  • Before you purchase a new policy or transfer an existing one, make sure you set up the trust.

Life Insurance

Understanding Trust-Owned Life Insurance (TOLI)

Life insurance is a contract between insurance companies and insured individuals. The insurer promises to pay beneficiaries a death benefit in exchange for regular premiums. The options available to consumers include term and permanent life, each of which has its own separate categories. One form of protection that many people often don't hear about is trust-owned life insurance.

As noted above, TOLI is a life insurance policy that is housed with a trust for estate planning purposes. Although it is a popular choice for people with high net worths, it can be used by anyone—namely those who want to:

  • Ensure the responsible distribution of inheritance assets among their heirs
  • Reduce estate tax liability
  • Meet their charitable objectives

You'll need the assistance of an estate planner to establish the trust before you do anything else. If you don't have a policy, the trust will generally seek out coverage for you. If you already have a policy, you'll have to fill out some paperwork to transfer it to the trust and name it as a beneficiary. Regardless of your situation, the premiums still have to be paid on time, which is something the trustee should take care of for you.

You can name any beneficiary(s) for the policy, but keep in mind that the tax implications differ based on who you appoint as the recipient of your death benefit. The amount paid out from your insurance policy won't be subject to estate taxes if your spouse is the beneficiary of your trust. But the proceeds will be when your spouse dies and you don't have a TOLI set up.

You can't avoid estate taxes if you pass on your assets within three years of your death. This is known as the three-year rule. To avoid this with a TOLI, make sure the trust takes out the policy directly from the insurer.

Special Considerations

Trust-owned insurance policies should be reviewed regularly because existing policies may not adequately meet the current needs of the trust. Newer insurance products might be more cost-efficient while offering better options and features. However, any newer product needs to be assessed carefully, as insurance policies tend to become more costly as people age.

If you expect the value of your estate to exceed the exemption amount or if the calculation is still unpredictable and you wish to cover your proverbial bases, it may be wise to establish an irrevocable life insurance trust (ILIT) and have the trust own your life insurance policies. This would remove the insurance proceeds from your estate completely so they can remain income and estate tax-free. 

Gifts made to ILITs shrink an estate's value, thus diminishing any associated tax burdens.

Advantages and Disadvantages of TOLI


When a life insurance policy is owned by an individual's ILIT, the assets housed within the trust are funneled to the beneficiaries without onerous federal estate tax obligations, as per the grantor’s directives. This is because the owner is actually the trust, which effectively omits the proceeds from the estate of the insured party.

A provision of this structure affords the trust the flexibility to make loans to either spouse's estate or to purchase assets from either estate in order to create the liquidity needed to pay estate taxes and other expenses.

ILITs let philanthropically-minded individuals donate funds to their favorite charitable causes while protecting inheritances for their loved ones by providing a death benefit that replaces the value of the charitable gifts.


The most glaring disadvantage is the loss of control. While a trustee is named to carry out the instructions of the trust, the grantor is effectively relinquishing ownership of the life insurance policy.

In cases wherein a life insurance policy isn’t initially established within the trust but is later transferred into it, it’s critically important to remember that there is a three-year look-back period. If you die within those three years, the insurance proceeds become part of your estate and will be subject to taxation. This is why it's generally prudent for individuals to conduct this type of planning in their 60s or 70s, rather than waiting until they're much older.

  • You can avoid the burden of estate taxes

  • Loans can be made to either spouse's estate or to purchase assets from either estate

  • You can donate to charity while protecting the assets for your heirs

  • You give up control when you house your policy in a trust

  • The three-year look-back rule applies if you take out the policy within three years of your death

Example of TOLI

Let's assume that you're 50, married, and have two children under the age of 16. Both you and your spouse earn $50,000 each year for a grand total of $100,000. You have an individual retirement account (IRA) worth $125,000, a 401(k) balance of $35,000, and a $10,000 certificate of deposit (CD). But you also have a mortgage of $240,000 and a car loan of $22,000.

Although you have savings, you still want to leave something behind for your family in case you die unexpectedly. One option would be to take out TOLI, especially if you want to ensure that your kids are taken care of and avoid estate taxes if your spouse also passes away.

You decide to approach an estate planner or legal representative to set up your estate, naming your spouse as the heir. This entity will purchase the policy on your behalf and be named as the beneficiary. If you should pass away, the estate receives the proceeds of the policy and passes it on to your spouse.

Article Sources
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  1. Internal Revenue Code. "26 IRC § 2035," Page 2394. Accessed Jan. 29, 2022.

  2. Internal Revenue Service. "Estate Tax." Accessed Jan. 29, 2022.