Can a Revocable Trust Purchase Life Insurance?

Direct Answer

A revocable living trust can purchase and own a life insurance policy. The trust acts as the policyowner, paying premiums and controlling the death benefit. This is a standard estate planning technique, but it changes how the policy is treated for tax, creditor, and beneficiary purposes.

How the Trust Becomes the Policyowner

When a revocable trust buys a life insurance policy, the trust is listed as the owner on the application. The grantor who created the trust often serves as the insured and the trustee. The trust then has the legal right to name beneficiaries, borrow against the cash value (if applicable), and surrender the policy.

Who Can Be the Insured

The insured can be the grantor, a spouse, or another person. If the grantor is the insured, the trust owns the policy but the grantor retains control as trustee. This is the most common setup for an irrevocable life insurance trust (ILIT) strategy, though revocable trusts are also used, particularly when the goal is to keep the policy within the estate for eventual distribution.

Tax and Creditor Implications

Because a revocable trust can be amended or revoked, the IRS generally treats the policy as part of the grantor's taxable estate. The death benefit is subject to estate tax if the estate exceeds the exemption threshold. Creditors of the grantor may also reach the policy's cash value and death benefit since the grantor retains beneficial ownership.

When a Revocable Trust Makes Sense

This structure is useful when the primary goal is to avoid probate for the life insurance proceeds and ensure a smooth transfer to beneficiaries. It is less effective for estate tax reduction. For that purpose, an irrevocable life insurance trust is typically preferred because it removes the policy from the taxable estate.

Key Considerations

• The trustee must manage premium payments to keep the policy in force.
• The policy proceeds are distributed according to the trust terms, not the will.
• State laws vary on how trusts interact with life insurance contracts.

Bottom Line

A revocable trust can purchase life insurance, but the policy remains part of the grantor's taxable estate. For estate tax savings, an irrevocable trust is the stronger choice. For probate avoidance and control, a revocable trust works as intended.