Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client has worked with an attorney to create a revocable living trust.  Should he transfer his existing life insurance policy to that trust?

Answer: It’s probably not necessary in most cases.

The primary reason most people create living trusts is to avoid probate.  To make their trusts effective, they transfer assets that would otherwise have to go through probate at death into the living trust.  Because the trust owns the property when the client dies, probate is not necessary.

Life insurance death benefits, by virtue of the beneficiary designation, already avoid probate.  The proceeds will be paid to the named beneficiary at the insured’s death regardless of what the insured’s will or living trust says without the need for probate.

If the client wants the asset management provisions of the trust to apply to the life insurance death benefit, simply making the trust the beneficiary of the life policy should be enough.

In some cases, the client may create and fund a living trust to help manage property in the event of the client’s incapacity.  If that is an important reason for the trust, it may make sense for the life policy to be owned by the trust as well.

By the way, having a revocable living trust own a life policy on the grantor’s life doesn’t keep the death benefit from being included in the insured’s taxable estate.  If estate tax exclusion is desired, that requires an irrevocable life insurance trust.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.