Can You Put a Joint Life Policy in Trust?

A joint life insurance policy can be placed within a trust to manage and distribute wealth. This combination can serve various financial planning objectives, including estate tax reduction and providing for beneficiaries. Understanding the distinct characteristics of both joint life insurance and trusts is foundational to effectively utilizing them together. The process involves considering trust types, identifying key parties, and following specific steps to align with long-term financial goals.

Understanding Joint Life Insurance and Trusts

Joint life insurance policies cover two individuals under a single contract, differing from individual policies that cover one person. There are two primary types of joint life insurance: first-to-die and second-to-die. A first-to-die policy pays out the death benefit upon the passing of the first insured individual, often used to cover shared financial obligations like a mortgage or to provide immediate financial support to the surviving partner. Once this benefit is paid, the policy terminates, requiring the survivor to seek new coverage if desired.

Conversely, a second-to-die, or survivorship, policy disburses the death benefit only after both insured individuals have passed away. This type is commonly employed in estate planning to provide liquidity for estate taxes or to leave a legacy for heirs, such as children or grandchildren. Second-to-die policies often have lower premiums compared to two individual policies because the payout is deferred until the second death, basing premiums on the joint life expectancy.

A trust is a legal arrangement where a grantor transfers assets to a trustee, who then manages these assets for the benefit of designated beneficiaries. This structure involves three main parties: the grantor, who creates and funds the trust; the trustee, who holds legal title to the assets and manages them according to the trust’s terms; and the beneficiaries, who receive the trust’s distributions. Trusts separate legal ownership from beneficial enjoyment, allowing assets to be held and distributed outside of individual ownership and potentially avoiding probate.

Key Decisions for Establishing a Policy Trust

Establishing a trust for a joint life insurance policy requires decisions to meet specific financial objectives. The most common vehicle for this purpose is an Irrevocable Life Insurance Trust (ILIT). An ILIT is designed to own life insurance policies, removing proceeds from the grantor’s taxable estate to reduce estate tax exposure. Once established, an ILIT cannot be modified or terminated without beneficiary consent.

Selecting a trustee is important, as this individual or entity manages trust assets and distributes funds according to the trust document. Trustee considerations include independence, expertise, and whether to appoint a family member, a professional corporate trustee, or a combination. An independent trustee helps exclude policy proceeds from the estate for tax purposes.

Defining beneficiaries outlines who receives policy proceeds and under what conditions. The trust document dictates how and when the death benefit is used. Funding an ILIT involves making gifts to the trust for premiums. To qualify these gifts for the annual gift tax exclusion ($19,000 per donee in 2025), Crummey powers are included in the trust document. These powers grant beneficiaries a temporary right to withdraw gifted funds.

The trustee sends annual Crummey notices to beneficiaries, informing them of their right to withdraw contributions for premium payments. Notices must specify the gift amount and withdrawal timeframe (30 to 60 days). If beneficiaries do not exercise this right, funds remain in the trust to pay premiums. The trust must be the legal owner of the joint life insurance policy from its inception or through transfer for the strategy to be effective.

Steps to Place a Joint Life Policy in Trust

Placing a joint life insurance policy into a trust involves procedural steps requiring professional guidance. The first step involves consulting an estate planning attorney specializing in trust law, along with a financial advisor or insurance agent. The attorney drafts the trust document, ensuring it aligns with legal requirements and the grantor’s wishes regarding the policy and beneficiaries.

Once prepared, the trust document is funded with a nominal amount to establish the trust entity. The trustee obtains a federal tax identification number for the trust, necessary for financial transactions. For a new joint life insurance policy, the trust, through its trustee, applies directly. This ensures the trust is the original owner and beneficiary from the outset.

If an existing joint life policy is placed into the trust, ownership must be assigned to the trust. This involves notifying the insurance company and completing change of ownership forms. The Internal Revenue Service’s three-year look-back rule states that if the insured dies within three years of transferring an existing policy to an ILIT, proceeds may be included in the taxable estate. This rule does not apply if the trust purchases a new policy from the beginning.

Ongoing trust administration is important. The trustee manages trust funds, including paying policy premiums. This includes sending annual Crummey notices to beneficiaries. Accurate record-keeping of all transactions and communications related to the trust and policy ensures compliance and transparency.