**Life insurance trust** (noun) — A trust established specifically to own one or more life insurance policies on the settlor's life. The trust is named as the beneficiary of the life insurance policies, and when the insured person dies, the insurance proceeds are paid into the trust rather than directly to individual beneficiaries. Life insurance trusts can be revocable or irrevocable, with irrevocable life insurance trusts (ILITs) commonly used for tax planning purposes.
A life insurance trust is a trust that owns your life insurance policy, so when you die, the insurance money goes into the trust instead of being paid directly to your beneficiaries.
Here's how it works: Instead of naming your spouse or children as beneficiaries of your life insurance, you create a trust and make the trust the beneficiary. You transfer ownership of the policy to the trust. When you die, the insurance company pays the death benefit to the trust, and the trustee then manages and distributes that money according to the trust terms.
Why would you do this? Several reasons:
In some jurisdictions, particularly the United States, an irrevocable life insurance trust can remove the policy proceeds from your taxable estate, potentially saving significant estate tax. The insurance pays out when you die, but because the trust owns the policy (not you), it's not counted as part of your estate.
A life insurance trust also gives you control over how the money is used after you're gone. Instead of your 18-year-old inheriting a million dollars in cash, the trust can provide for their education, living expenses, and future needs in a structured way.
It can protect the proceeds from creditors, divorce claims, or poor financial decisions by beneficiaries. And it can coordinate the insurance proceeds with your overall estate plan in ways that aren't possible when insurance pays directly to named beneficiaries.
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Life insurance trusts are sophisticated estate planning tools that make sense in some situations but aren't necessary for everyone.
The most common type is an irrevocable life insurance trust (ILIT). "Irrevocable" means once you create it and transfer the policy, you can't change your mind—you've permanently given up ownership of the policy. This is necessary for the tax benefits to work. The trust becomes the policy owner and beneficiary, and you can't get it back.
For an ILIT to achieve its tax objectives, you must survive for a certain period (typically three years) after transferring the policy to the trust. If you die within that period, the proceeds might still be included in your taxable estate, defeating the purpose.
There's also complexity in maintaining an ILIT. You need to fund the trust with cash so it can pay the insurance premiums. This usually involves annual gifts to the trust, which must be structured carefully (using what's called "Crummey powers") to qualify for gift tax exemptions. You'll need a trustee—someone other than you—to manage the trust and pay the premiums.
Life insurance trusts are most beneficial when: - Your estate is large enough that estate tax is a concern - You want to provide for beneficiaries in a controlled way rather than a lump sum - You want to protect insurance proceeds from beneficiaries' creditors or divorcing spouses - You have complex family situations that benefit from professional management
For smaller estates where tax isn't a concern, or simpler situations, directly naming beneficiaries on your life insurance policy is usually sufficient. The insurance proceeds pass outside your estate anyway (going directly to the named beneficiaries), avoiding probate and most complications.
If you're considering a life insurance trust, you need specialized legal and tax advice. The setup must be done correctly to achieve the intended tax benefits, and ongoing administration requires careful attention to detail. Get it wrong, and you might not save any tax while creating unnecessary complexity and expense.
Revocable life insurance trusts (where you retain the ability to change or terminate the trust) don't provide tax benefits but can still be useful for managing how proceeds are distributed to beneficiaries, particularly minor children or adults who need help managing money.
**Related terms:** [Trust](/dictionary/trust), [Irrevocable trust](/dictionary/irrevocable-trust), [Beneficiary](/dictionary/beneficiary), [Estate tax](/dictionary/estate-tax)
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