Designing Ownership to Shield Policies from Lawsuits, Divorce, and Business Claims

High-net-worth (HNW) clients in the United States increasingly use precise ownership design and insurance architecture to keep life insurance, annuities, and other policy-value assets out of reach of creditors, divorcing spouses, and aggressive business claimants. This article explains practical ownership structures, state-law differences, cost expectations, and steps to implement defensible plans for clients in major U.S. jurisdictions (e.g., Florida, California, Texas, New York).

Note: This article is educational and not legal or tax advice. Coordinate any plan with ERISA, tax counsel, and a licensed estate planning attorney.

Why ownership design matters

Insurance policies can be treated as property for creditor and matrimonial claims. Ownership determines:

• Who controls the policy (ability to change beneficiary, surrender, borrow)
• Whether proceeds are reachable by claimants before and after death
• How policies are taxed (estate inclusion, gift issues, income tax)

Common goals for HNW families:

• Keep death benefits outside the insured’s probate estate and creditor reach
• Provide liquidity for estate taxes, buy-sell obligations, or marital obligations without exposing the underlying policy to claims
• Preserve multigenerational wealth via controlled distributions

Primary ownership strategies — overview and comparative table

(Setup cost ranges reflect typical U.S. market experience for HNW planning and trustee services; actual pricing varies by state and firm.)

How ILITs shield policies from lawsuits and divorce

An Irrevocable Life Insurance Trust (ILIT) remains the most widely used technique to shield death benefits:

• The grantor gifts premium funds to the ILIT (often via annual Crummey withdrawal powers to preserve present-interest gift exclusion).
• The ILIT becomes policy owner and beneficiary. Because the trust is irrevocable, the policy generally does not belong to the insured at death and is excluded from the insured’s taxable estate—if the 3-year rule is observed.
• With an independent trustee and spendthrift language, beneficiaries’ creditors typically cannot access trust distributions.

Practical figures and considerations:

• Attorney drafting fees typically range from $2,000 to $10,000 (complex plans with dynasty/foreign situs provisions cost more).
• Professional trustee fees range widely—family office or bank trust department charges often begin at $3,000–$10,000/year depending on assets and administration complexity.

For litigation and divorce, a properly administered ILIT with independent ownership and arm’s-length premium funding is among the strongest barriers. See also creditor/ownership coordination: Creditor Protection and Structured Ownership: How Trusts and Policies Work Together.

Divorce-specific tactics

Divorce introduces special hazards—family courts scrutinize transfers:

• Pre- and post-nuptial agreements are primary tools to designate life insurance proceeds as separate property or secure support obligations.
• An ILIT funded prior to marriage or with properly documented intention may resist division; transfers made with intent to hide assets for divorce are reversible.
• State rules differ: in community-property states (e.g., California, Texas), courts may treat policies purchased during marriage as marital property. In equitable-distribution states (e.g., New York, Florida), characterizations differ.

Always pair insurance ownership with a marital agreement and contemporaneous documentation. For state-by-state nuances, consult: State Law Variations in Creditor Protection for Life Insurance: A Practical Guide.

Business claims — corporate-owned and captive alternatives

Business owners face claims that can pierce corporate veils. Ownership design options:

• Keep personal policies in ILITs rather than naming the business as owner/beneficiary.
• When business continuity is the goal (buy-sell financing), use cross-purchase agreements funded by individually owned policies or a properly structured redemption trust to avoid exposing personal policies to business creditors.
• Consider captives or private placement life insurance (PPLI) when complex underwriting, investment control, or risk retention is desirable. Captive formation and maintenance are expensive and require actuarial justification.

For captive alternatives and when they make sense, read: Captive Insurance Alternatives for HNW Families: When a Captive Makes Sense.

Insurance product selection and pricing expectations (U.S. market)

Product choice affects protection and cost:

• Term life: lowest cost for pure death-benefit protection. Example market guidance: a healthy 40-year-old non-smoker can often buy a $1,000,000 20-year level term policy for roughly $300–$800/year depending on carrier and underwriting. Online broker averages are published by independent aggregators like Policygenius. (See Policygenius for market examples: https://www.policygenius.com/life-insurance/)
• Permanent life (universal/indexed/PPLI): higher premiums but offers cash value and estate planning flexibility. Premiums frequently run several thousand to tens of thousands per year for significant death benefits used in estate tax planning.
• Umbrella liability: protects against large third-party claims. For middle-market individuals, $1M of umbrella coverage often costs $150–$400/year; HNW clients seeking very high limits or specialized risk profiles will pay materially more—often $1,000–$10,000+/year through specialty carriers like Chubb, AIG, and Travelers depending on assets and exposures. Chubb’s private client programs are commonly used for excess liability in U.S. markets (e.g., Florida, NY, California)—see Chubb’s client resources for program details: https://www.chubb.com/us-en/individuals-families.html
• Private Placement Life Insurance (PPLI): for sophisticated HNW clients seeking tax-efficient investment inside life insurance and added creditor protection. Providers include major wealth-management firms and specialized insurers; PPLI is bespoke and fee structures vary markedly by insurer and asset composition.

Authoritative tax/insurance guidance:

• Federal tax treatment of life insurance: IRS Topic No. 703 (Life Insurance and Annuities) — https://www.irs.gov/taxtopics/tc703
• Umbrella and liability basics: Investopedia overview — https://www.investopedia.com/terms/u/umbrella-insurance.asp

Implementation checklist (practical steps for advisors and families)

• Identify protection goals: lawsuits, marital dissolution, business claims, estate tax liquidity.
• Choose product(s): term for cost-effective bridge; permanent/PPLI for long-term tax-advantaged solutions.
• Select ownership vehicle: ILIT for estate/creditor shield; consider non-grantor trust for creditor protection and dynasty planning.
• Document funding mechanics: annual Crummey letters, spousal consents, buy-sell funding flows.
• Coordinate with marital agreements and corporate governance documents.
• Appoint independent trustees and review state-law exemptions for life insurance and annuities in client domiciles (Florida, Texas, California, New York differ significantly).
• Stress-test scenarios where insurance may fail or be attacked in litigation: sham transfers, fraudulent conveyance claims, or improper beneficiary design. See: Stress-Testing Protection Strategies: Scenarios Where Insurance Fails to Shield Wealth.

Common pitfalls and red flags

• Last-minute transfers designed to avoid imminent claims or divorce — risk of fraudulent-transfer litigation.
• Grantor control retained over an “irrevocable” trust (makes the trust collapse to grantor status).
• Using business entities as owners without addressing piercing risks — courts can reach assets when corporate formalities fail.
• Failing to update ownership and beneficiary design after major life events (move to a different state, divorce, business sale).

Working with vendors and expected fees in target U.S. locations

• ILIT drafting and local counsel: $2,000–$10,000 (higher in New York and California).
• Corporate trustee/bank trust department (NY, Florida): $3,000–$10,000/year.
• High-limit umbrella through specialty carriers (Chubb, AIG): market-dependent—typical HNW client budgets $2,000–$15,000/year depending on exposures and limits.
• PPLI: placement & administration fees are bespoke—initial feasibility often costs $10,000+ and ongoing wrap fees depend on investment management and insurer.

Next practical step

Map the client’s risk exposures, domicile-specific protections, and estate-tax objectives. Integrate ownership design with life insurance product selection, marital agreements, and corporate governance. For coordinated strategies that combine trusts and policies, see: Using Life Insurance as an Asset-Protection Layer in HNW Estate Plans.

For hands-on implementation, engage a multi-disciplinary team: estate and family-law attorneys (state-licensed), tax counsel, an actuarial or captive specialist if needed, and insurance carriers experienced with HNW placements.