Originally Posted by urn2bfree
Ok- some clarity-- THE INSURED is my son. Very healthy 23 year old who does not need life insurance--certainly not whole life.. Currently the premiums are paid by the dividends and the cash value of the policy as tapped as needed to supplement that.
I agree it should be cashed out... The question is HOW to best do that.
I have since learned that the owner of the policy is not me--it was my father's revocable trust when he was alive. Since he died, I am not clear on what happens with ownership, but I am trying to get that answer. I believe it remains owned by the Trust and governed by the new Trustee(s) (?my mother and older brother?) If they transfer it to my son does that exceed the gift amount and generate a taxable event on the whole value-- If so it seems it would be better for the Trust to cash it and GIFT him the proceeds less the taxes due- after paying taxes on the gain only....with the gift spread out over two or more tax years as needed to avoid the $14000 excess rule on gifts.
I'll play devils advocate. If your dad bought this policy around when your son was born then it may have some attributes that are worthwhile. back then many policies had minimum guaranteed interest rates of 4%.
Since you are using dividends to pay premiums, how much did the cash value increase during the last policy year? My guess would be close to 4%. Where can you son find a high quality bond with NO interest rate risk that pays almost 4%? Unless you son is desparate for the money, keep it and let it grow.
While you son currently does not need life insurance, he may someday and this would provide a death benefit for his beneficiaries. Also, there is some chance that something could happen where you son would be precluded from purchasing life insurance in the future and this would be there.
If your son needs the money, once he owns the policy he could take out policy loans to get cash. I wouldn't be in such a hurry to cash it in.
While I wouldn't advise a 23 year old to go out an buy whole life insurance, an established policy has its best years ahead of it. I have a whole life policy that I bought as a 22 year old... it provided guaranteed insurability for me if something had happened to me, was a part of the life insurance protection that our young family needed and is now part of my "bond" portfolio and pays me ~4% with no interest rate risk and minimal credit risk.
But all that is here nor there........ most trusts have specific provisions as to how trust assets are to be used and the co-trustees should abide by those provisions.