Understanding the advantages of revocable life insurance trusts can help make the best-educated policy decisions. Among the advantages of a revocable life insurance trust, in addition to or as a consequence of making a revocable trust beneficiary of life insurance proceeds, are the following:
- If a revocable trust is named as the beneficiary of all of a client’s life insurance, a simple amendment to the trust can instantly achieve a redistribution of the proceeds of dozens of policies. This should save the client considerable time and aggravation, compared to filling out a multiplicity of forms from numerous insurance companies.
- Life insurance proceeds payable to a revocable trust are immediately available for the trustee’s disposition. Conversely, insurance proceeds payable to a testamentary trust will not be available to the beneficiaries until the will has been admitted to probate and the trustee has accepted the trust. In some cases, there may be a delay of several years between admission of the will to probate and acceptance and final funding of the trust.
- The transfer of a life insurance policy to the trust, the designation of the trustee as the beneficiary, and even the distribution of the proceeds to the trustee can generally be structured as tax-free transactions.
- Use of a trust makes the disposition of a policy easier where the beneficiary predeceases the insured. Compare this with an outright gift of the policy to a beneficiary who then dies before the insured. If a trust is used, it can continue to hold the policy after the predeceasing beneficiary’s death and eventually transfer it to another party and in the way the insured client intended.
- Probate is avoided with respect to a policy held by or payable to a revocable trust that continues after the beneficiary’s death. Compare this with an outright gift of a policy to a beneficiary who then dies. If the intended individual beneficiary dies either prior to or after the insured, the policy or its proceeds are likely to be subjected to the costs, delays, and uncertainties of probate. Under the revocable trust document, interim distributions to the client’s surviving spouse and/or children can be made without waiting for court approval.
- Use of a revocable life insurance trust assures continuation of the privacy of life insurance since there is no publicity and the amount of proceeds and other assets in the trust, as well as the terms of the trust, are not open to public scrutiny as are the reports and accounts filed with the probate court. Use of a revocable living trust as the receptacle for life insurance continues the exemption of proceeds from some states’ death tax.
- To some limited extent (varying widely from state to state), life insurance proceeds payable to a revocable trust may be insulated from the claims of the grantor’s creditors and the claims of the grantor’s surviving spouse through an attack on the will or election against the will.
- Using a trust continues the privacy afforded through life insurance. Confidentiality of who receives the proceeds and how much they receive is generally maintained for a longer period of time than if the proceeds were paid outright.
- All the client’s assets (such as life insurance, pension plan, IRA, and personal property) can be “poured over” into a revocable living trust. The trust serves as a unifying receptacle for the collection of assets from a variety of sources and makes it easier to coordinate life insurance with other sources of financial security.
- Compared to the use of settlement options, a trust provides significantly greater flexibility in terms of the trustee’s ability to sprinkle income or spray capital when and as needed by the beneficiaries.
- Compared to the use of settlement options, a trust makes it possible for the beneficiary to receive greater income and appreciation of capital. (Of course, both advantages entail greater risk.)
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM