Can You Put Your Life Insurance in a Trust?

Short Answer

Yes, you can place a life insurance policy in a trust, but it depends on the type of policy and the trust's purpose. A revocable living trust can hold a policy as an asset, while a specially designed irrevocable life insurance trust (ILIT) can remove the policy from your taxable estate.

Why Consider a Trust?

Holding a policy in a trust can streamline succession planning, protect beneficiaries from probate, and provide tax advantages if the trust is structured as an ILIT. It also allows the grantor to set specific distribution rules.

Types of Trusts for Life Insurance

Revocable Living Trust: The policy owner remains the insured and can change the trust terms. The policy's proceeds go directly to the trust, but the policy remains in the owner's estate for tax purposes.

Irrevocable Life Insurance Trust (ILIT): The trust owns the policy, making it a separate legal entity. The policy's death benefit is excluded from the grantor's estate, potentially reducing estate taxes.

Key Considerations

• Ownership: The trust must be the owner of the policy to achieve estate tax benefits.
• Premium Payments: The grantor must fund the trust's premiums, often via a 1035 rollover or other tax‑efficient methods.
• Policy Loans: ILITs can issue loans against the policy's cash value, which may affect the death benefit and tax treatment.

Steps to Transfer a Policy into a Trust

1. Draft or modify the trust document to name the trust as the policy owner or beneficiary.2. Complete a policy change of ownership form with the insurer.3. Transfer premium payments to the trust or arrange a 1035 exchange to avoid immediate taxation.4. Update beneficiary designations to reflect the trust's terms.

Potential Drawbacks

Transferring a policy into an irrevocable trust can be complex, may require relinquishing control, and can trigger gift tax consequences if not done correctly. Consulting a qualified estate attorney and tax professional is essential.