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The Role of Existing Insurance Trusts in Divorce

By Martin M. Shenkman

Life insurance is a common issue addressed in a substantial proportion of divorces. For many clients, especially those of greater economic means, existing insurance coverage is owned by irrevocable life insurance trusts ('ILIT'). Existing ILIT arrangements too often receive inadequate attention during the course of a divorce as a result of the focus on other more significant issues, or the presumption that since the ILIT is 'irrevocable,' it cannot be tailored to address the post-divorce insurance needs. This can be a considerable mistake. In many cases, because it is assumed that an existing ILIT cannot be changed, the insurance requirements resulting from the divorce are separately addressed in a property settlement agreement ('PSA').

For example, a husband may have funded an insurance trust ten years previously, when the marriage was solid, and the trust may have purchased insurance on his life. Rather than addressing how that pre-existing ILIT can be dealt with, in most cases the PSA will simply mandate new minimum insurance requirements that the ex-husband has to provide for the ex-wife and children. In many cases, better, or less costly coverage can be obtained through modifications of the existing insurance trust. In some cases, due to health or other factors, it becomes essential to deal with the existing insurance trust.

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