What is a Revocable Life Insurance Trust?

A revocable trust, as its name implies, is a trust established during a client’s lifetime that can be revoked by the client. The client who sets up a revocable trust specifically reserves the right, at any time (until specifically making the trust irrevocable or until death, at which time it becomes irrevocable), to alter or amend its terms or terminate the trust and recover its assets. In most states, a trust is irrevocable unless the trust document specifically provides otherwise. Also, a revocable trust is generally irrevocable while the grantor is incompetent.

If the revocable trust, through its trustee, is designated as the beneficiary (or as both the owner and beneficiary) of one or more insurance policies on the life of the trust’s grantor, the trust is a revocable life insurance trust. The policy owner names the trust as beneficiary of the policy proceeds and the trustee is directed in the trust agreement to hold those proceeds for the beneficiaries of the trust to be distributed in the time and manner specified in the trust document.

When a revocable life insurance trust is created, the policy owner typically reserves all of the ownership rights in the policies and, unless the trust is funded with income producing assets, the policyowner will continue to be responsible to pay all premiums. If the trust is funded with income producing property, the trustee usually will be required to use the income from those assets to keep the insurance in force.

Actually, life insurance policies are seldom transferred to a revocable trust. Although the mere designation of a trust as the beneficiary of life insurance is sufficient in most states to create the trust, most cautious authorities suggest some other cash or other asset be placed into the trust as well to thwart an argument in a jurisdiction that may not clearly accept such a designation as adequate.

Note that a formal trust document should always be created since the mere designation of trustee as policy beneficiary will not, per se, establish a trust. Absent sufficient evidence to prove that a trust was intended, the policy proceeds will be paid outright (probably to the insured’s estate if no other beneficiary was named). But if it can be shown that a trust was intended, even if the trust should fail for technical reasons, a resulting trust (a fictitious trust created by law to uphold the creator’s wishes) occurs and the proceeds are held for the beneficiary.

A revocable trust can be named as a contingent beneficiary of policy proceeds so that if the primary or even backup beneficiary died before the insured, there would be a receptacle for the money. For instance, a parent might name the other parent as primary beneficiary but provide in the insurance application that “If my spouse predeceases me, proceeds are to be paid to Thomas Trustworthy, trustee of the living trust I have established.”

There is one good reason to transfer ownership of life insurance policies to a revocable trust and have the trustee name the trust as beneficiary: if the grantor becomes incapacitated, the trustee can if necessary, borrow the cash value of the policies to keep them in force.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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