Can life insurance proceeds go into a trust?

Yes, life insurance proceeds can be put in a trust, and this is one of the common strategies in the field of estate planning. There are various advantages that come with holding life insurance proceeds in trust, especially in saving on taxes, asset protection, and the distribution of the funds according to the will of the policyholder. Here are the major advantages:

1. Irrevocable Life Insurance Trust: The use of an Irrevocable Life Insurance Trust is one of the most prevalent ways to put life insurance proceeds into a trust. An ILIT is designed specifically to maintain life insurance policies and make sure the death benefits are kept out of the policyholder's estate to avoidance of estate taxes.
2. Tax Benefits: One of the major advantages of placing life insurance proceeds in a trust is that such proceeds are not treated as part of the policyholder's taxable estate. For this reason, they can reduce estate tax liability, particularly for those whose estates are quite sizable. Transfers using an ILIT may largely reduce estate taxes because the life insurance death benefits transferred are excluded from the estate.
3. Control of Distribution: One of the biggest advantages of placing life insurance proceeds into a trust is the control it gives about how and when funds are distributed. The trust can state how and when the proceeds are disbursed to the beneficiaries. This can be quite helpful when the beneficiaries happen to be minors, inexperienced financially, or have special needs. In fact, the trust may stipulate conditions upon which distributions would be made at specific ages or milestones.
4. Asset Protection: The proceeds of life insurance policies held within a trust may be exempt from the claims of creditors, lawsuits, or divorce settlements. This not only maintains the funds for use as intended but protects the funds from the financial or legal problems of the beneficiaries.
5. Privacy: Since the settlement through a trust avoids public probate, the use of a trust as beneficiary of the life insurance policy ensures privacy. In fact, whether or not a certain sum of money is paid from life insurance is not a matter of public record, and for that reason, anyone desiring a greater degree of confidentiality will welcome this advantage.
6. Administrative Considerations: The receipt of life insurance proceeds under a trust is not an accident; some planning is involved. A trustee is usually appointed to manage the funds and enforce the terms for distribution. He or she is bound by duty to look after the money with care and in the manner best fit as intended by the deceased policyholder.

The bottom line is that life insurance policy proceeds can be paid into a trust, and such will afford huge advantages of tax savings, control, asset protection, and privacy. Making this work correctly requires engaging an estate planning professional to establish the trust to meet the policyholder's goals.