Can Life Insurance Go Into a Trust?

Life insurance can be placed into a trust, a common estate planning strategy to manage and distribute policy proceeds. This approach offers advantages like control over beneficiary distributions and potential estate tax benefits. Integrating life insurance with a trust requires understanding legal and financial considerations to align with individual goals.

Fundamentals of Trust Ownership for Life Insurance

A trust is a legal arrangement where a third party (the trustee) holds and manages assets for designated beneficiaries. The person creating the trust is the grantor. When a life insurance policy is placed into a trust, the trust becomes the legal owner, separating it from the insured’s personal estate. This separation offers several benefits.

A primary advantage of trust ownership for life insurance is bypassing probate. Probate is the legal process validating a will and distributing assets. By holding the policy, the trust receives the death benefit directly upon the insured’s passing, allowing quicker distribution to beneficiaries, often in weeks rather than months. This also maintains privacy, as trust documents are not public record like wills.

A trust further provides a structured framework for asset management. The grantor can dictate specific terms for how and when funds are distributed, which is useful for minor beneficiaries or those needing managed financial support.

Irrevocable Life Insurance Trusts (ILITs)

Irrevocable Life Insurance Trusts (ILITs) are specialized trusts designed to hold life insurance policies outside the insured’s taxable estate. Their defining characteristic is irrevocability; once established, the grantor cannot modify or terminate the trust. This lack of control allows life insurance proceeds to be excluded from the grantor’s gross estate for federal estate tax purposes.

The exclusion from the taxable estate is a significant benefit, especially for individuals whose estates might exceed the federal estate tax exemption amount, which is $13.99 million per individual in 2025. Without an ILIT, if the policyholder owns the life insurance policy at their death, the death benefit would be included in their taxable estate, potentially subjecting it to estate taxes. By having the ILIT own the policy, the death benefit can pass to beneficiaries free of federal estate taxes, preserving more wealth.

ILITs also offer creditor protection for policy proceeds, as trust assets are shielded from claims against the insured’s estate. Funding an ILIT involves either transferring an existing policy or having the ILIT purchase a new one. If an existing policy is transferred, a three-year look-back period applies, meaning proceeds are included in the grantor’s estate if death occurs within three years of transfer. If the ILIT purchases a new policy, proceeds are outside the estate from the outset, avoiding this rule.

Premium payments for policies held within an ILIT are made by the grantor as gifts to the trust, which the trustee uses to pay the insurer. These gifts may utilize the annual gift tax exclusion ($19,000 per beneficiary in 2025), provided beneficiaries have a temporary right to withdraw the gifted funds, often via “Crummey” powers. The trustee must notify beneficiaries of these withdrawal rights with each contribution.

Revocable Life Insurance Trusts

A revocable life insurance trust can be changed or terminated by the grantor during their lifetime. This flexibility means the grantor retains control over trust assets and terms. While a revocable trust can hold a life insurance policy and help avoid probate, it does not remove the policy from the grantor’s taxable estate for federal estate tax purposes.

Despite lacking estate tax benefits, revocable trusts suit certain situations. They provide a mechanism to control life insurance proceeds distribution, especially for minors or those benefiting from structured disbursements over time. This prevents immediate, unmanaged access to a large inheritance. Revocable trusts also offer estate liquidity, providing funds for expenses like taxes and debts without forcing asset sales. Their ease of modification appeals to those anticipating estate plan adjustments.

Establishing and Managing a Life Insurance Trust

Establishing a life insurance trust involves several steps, requiring an estate planning attorney’s guidance. The process begins with drafting the trust document, which outlines its terms, including the trustee, beneficiaries, and asset distribution rules. The attorney ensures the document meets legal requirements and reflects the grantor’s wishes.

Once the trust document is executed, the next step is transferring policy ownership to the trust. This involves contacting the insurance company and completing forms, such as an assignment of ownership, to change the policyholder from the individual to the trust. For new policies, the trust can be named as the original owner and beneficiary from the outset.

Premium payments for policies held by the trust require careful management. The grantor makes gifts of funds to the trust, which the trustee then uses to pay premiums. For ILITs, this involves the trustee sending “Crummey” notices to beneficiaries to qualify gifts for annual gift tax exclusions.

The trustee’s ongoing responsibilities include ensuring timely premium payments, managing any other trust assets, maintaining records for tax purposes, and distributing life insurance proceeds to beneficiaries according to the trust’s terms upon the insured’s death.

Important Considerations for Trust Creation

Before placing life insurance into a trust, individuals should weigh several considerations. For ILITs, a primary factor is the loss of policy control. Once transferred to an irrevocable trust, the grantor relinquishes ownership and the ability to change beneficiaries, borrow against cash value, or terminate the policy. This irrevocability means the trust’s terms cannot be altered, even if personal circumstances change.

Establishing and managing a life insurance trust also involves costs. Initial legal fees for drafting the trust document can range from a few thousand dollars depending on complexity. There may also be ongoing administrative costs, particularly if a professional trustee, such as a bank or trust company, is appointed. These fees can include annual management charges.

Life insurance trusts introduce complexity to estate planning. Setting up and managing a trust requires attention to detail and adherence to legal and tax rules. Mistakes in structure or administration can negate intended benefits, like estate tax exclusion. Given these complexities, consulting experienced estate planning attorneys and financial advisors is advisable. These professionals ensure the trust is properly structured to meet goals, complies with tax laws, and is administered correctly.