top of page

Trust-Owned Linked-Benefit Long-Term Care Insurance

Long-Term Care Insurance

What Is Long-Term Care?

Long Term Care (LTC) is a specialized set of services required when an individual suffers from a chronic illness, or an accident renders them physically or mentally unable to care for themselves. These services can be very costly, and many people choose to protect themselves against this risk by purchasing LTC insurance.

Life Insurance with a Long-Term Care (LTC) Rider

Insurers offer the combination of two different forms of insurance coverage by linking a life Insurance policy with LTC accelerated benefit and LTC extension of benefits riders. If LTC is required, the policy pays benefits to help offset costs. The death benefit of the insurance policy is typically reduced dollar-for-dollar by the amounts paid out as LTC benefits. However, if the insured never requires LTC, or only uses a portion of the LTC benefit, any remaining life insurance death benefit will be available for beneficiaries upon the death of the insured.

Possible Estate Tax Consequences

Although this "hybrid" or "linked-benefit" type of insurance policy efficiently combines two important forms of insurance, it also creates a challenge for estate tax planning purposes. In general, if a life insurance policy is owned by an individual, the policy’s proceeds are subject to estate tax at death. Often, an Irrevocable Life Insurance Trust (ILIT) is created to own the insurance policy, thereby removing the proceeds from the taxable estate.

However, if an ILIT owns a hybrid policy, the trust becomes the potential recipient of any LTC benefits. If the trustee makes monetary distributions to the grantor (insured), or benefits are reimbursed to an LTC service or facility for the benefit of the grantor, the entire trust could be included in the grantor (insured’s) taxable estate.

Therefore, the question is: How can an ILIT own a hybrid policy to ensure the life insurance is outside of the estate but still make funds available to provide for LTC needs? Fortunately, there is a solution. While the ILIT cannot directly pay the LTC expenses of an insured, it can contain a provision to allow it to make loans to the insured.

How Does the Strategy Work?

  • The grantor transfers funds to the ILIT, which are subject to gift tax. However, annual exclusions and the lifetime gift tax exemption can be used to insulate some, or all, of the transfers from gift tax.

  • The trustee purchases a life insurance policy with an indemnity LTC rider, insuring the grantor’s life.

  • Should the grantor require LTC, benefits would be paid to the ILIT. Life insurance death benefits are reduced accordingly.

  • As an unrelated transaction, the trust may make collateralized loans to the grantor. Loan interest must be charged and would be due annually on the loan.

  • At death, any remaining death benefit of the policy will be paid to the ILIT. Before estate taxes are deter- mined, the grantor’s estate repays the loan to the ILIT.

  • The trust assets can be distributed estate-tax free to the trust’s beneficiaries, including the insurance proceeds and the repaid loan and interest.

The results:

  • The grantor has funds to pay LTC expenses.

  • The trust is made whole again with the remaining death benefit and the repaid principal.

  • Additional funds have been added to the trust through the interest payments.

  • The taxable estate has been reduced.


  • The grantor should not direct the trust to use LTC insurance benefits to cover their LTC expenses. Doing so may be regarded as a retained interest in the trust, causing the trust assets to be included in the estate for estate tax purposes.

  • The insurance policy must pay LTC benefits on an indemnity basis. The trust itself must file the claim for benefits independent of the insured/grantor.

  • The trustee must be unrelated to the grantor.

  • There is no direct IRS authority concerning the use of an ILIT, and its suitability must be determined by legal and tax advisors on a case-by-case basis.

Trust-Owned Long-Term Care Insurance

  • A grantor establishes an ILIT that will allow for collateralized loans and funds it with taxable gifts. Annual exclusions and the lifetime gift tax exemption can be used to shelter some or all of the gifts from gift tax.

  • The trust uses funds to purchase a life insurance policy with an indemnity-style long-term care rider from an insurance company.

When Long-Term Care is Needed

  • The insurance company pays long-term care benefits to the trust.

  • The trust makes collateralized loans to the grantor at a required interest rate. The grantor will pay interest annually to the trust.

At Death

  • The estate of the grantor repays the loans to the trust.

  • Any remaining life insurance benefits are paid to the trust.

  • Proceeds are distributed to the beneficiaries per the trust’s provisions free of estate tax.


This material and the opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. The tax and legal references attached herein are designed to provide accurate and authoritative information with regard to the subject matter covered and are provided with the understanding that neither TRC Financial, nor M Financial are engaged in rendering tax, legal, or actuarial services. If tax, legal, or actuarial advice is required, you should consult your accountant, attorney, or actuary. Neither TRC Financial, nor M Financial should replace those advisors.


bottom of page