How to Put a Life Insurance Policy in a Trust

A life insurance trust is a legal arrangement designed to manage a life insurance policy and its eventual proceeds. This specialized trust holds ownership of the policy, allowing its benefits to be distributed according to the grantor’s specific instructions. Establishing such a trust provides a structured framework for handling policy payouts as intended.

Understanding an Irrevocable Life Insurance Trust (ILIT)

An Irrevocable Life Insurance Trust (ILIT) is a distinct legal entity structured to own a life insurance policy. This type of trust is irrevocable, meaning its terms generally cannot be altered, amended, or revoked by the grantor once established. This inflexibility provides certain benefits in estate planning. The trust itself becomes the legal owner of the life insurance policy, rather than the individual who established it.

The operation of an ILIT involves three primary parties, each with defined roles. The Grantor is the individual who establishes the trust and typically funds it, often by making gifts to cover premium payments. The Trustee is the person or entity appointed to manage the trust’s assets, including the life insurance policy, and to carry out the trust’s terms according to the grantor’s wishes. This management includes ensuring premium payments are made and, upon the insured’s death, distributing the policy proceeds to the designated beneficiaries.

Beneficiaries are the individuals or entities designated to receive the death benefit from the life insurance policy held within the trust. Their entitlement to the proceeds is governed strictly by the provisions outlined in the trust document. The grantor relinquishes direct control and ownership of the policy once it is placed into the ILIT.

Gathering Information and Preparing for Trust Creation

Before formally establishing an Irrevocable Life Insurance Trust, gather specific information and make informed decisions about the trust’s structure. Collect life insurance policy details, including the insurer’s name, policy number, current death benefit, any existing beneficiary designations, and the premium payment schedule.

Information about the grantor is also essential for legal documentation, encompassing full legal names and addresses. The selection of a suitable trustee is a significant decision, as this individual or professional entity will hold fiduciary duties over the trust’s assets. Consider trustworthiness, financial acumen, and a willingness to undertake the ongoing administrative responsibilities.

Identifying and clearly listing the intended beneficiaries is another crucial preparatory step. This involves specifying primary and contingent beneficiaries, along with the desired method of distribution, such as lump sums or staggered payments over time. An initial strategy for funding the policy’s premiums should also be considered.

Creating the Trust Document and Transferring Policy Ownership

The formal creation of an Irrevocable Life Insurance Trust begins with drafting the trust document, typically with the assistance of an attorney experienced in estate planning. This legal document outlines the specific terms and conditions under which the trust will operate, including the powers granted to the trustee and the detailed instructions for distributing policy proceeds to beneficiaries.

Once drafted, the trust agreement must be formally executed to become legally binding. This usually involves the grantor and the trustee signing the document in the presence of witnesses and a notary public.

For an existing life insurance policy, transferring ownership to the newly established ILIT is a precise process. This involves obtaining an absolute assignment form from the insurance company, which legally transfers all ownership rights from the grantor to the trust. The form must be completed accurately, identifying the trust as the new owner, and then submitted to the insurance carrier. If a new policy is being purchased specifically for the ILIT, the trustee applies for the life insurance policy from its inception, ensuring the trust is the original owner.

Ongoing Management of the Life Insurance Trust

After an Irrevocable Life Insurance Trust has been established and the policy placed within it, ongoing management becomes the responsibility of the appointed trustee. The trustee’s primary duties include ensuring that all premium payments for the life insurance policy are made consistently and on time to prevent the policy from lapsing. Maintaining meticulous records of all trust activities, including policy statements and financial transactions, is also a fundamental duty.

Premium payments to the trust are typically facilitated through gifts made by the grantor. For these gifts to qualify for the annual gift tax exclusion, the trustee must issue “Crummey notices” to the beneficiaries. These notices inform beneficiaries of their temporary right to withdraw the gifted funds, a legal formality that allows the gift to be considered a present interest.

Annual administration of the ILIT also involves reviewing the trust terms and beneficiary designations periodically to ensure they still align with the grantor’s wishes and current circumstances. The trustee is also responsible for communicating with beneficiaries, particularly upon the insured’s death, and managing the distribution of the life insurance proceeds according to the trust’s specific instructions.