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Should My Trustee Be The Beneficiary Of My Life Insurance Policy? | Illinois Estate Planning

Article written by Illinois & Iowa Attorney Kevin O'Flaherty
Updated on
November 1, 2019

Trusts as a Beneficiary to a Life Insurance Policy

This week, I received the following question from a reader.​

Q:  Hi I read your blog about funding a revocable trust.  My husband and I are talking about getting them, but all we have of significant value (besides house, and a money market ($500,000), is life insurance on his life ($2M).  Your article says you should keep the beneficiary of a life insurance policy first to a wife then to a trust. Why?

‍A:  Whether to make your revocable living trust the beneficiary of your life insurance policy depends on your personal situation and what your goals are.  There is no one-size-fits-all answer to this question, so it is important to have your attorney educate you and assist you in making an informed decision. 

Estate Tax Considerations

The first issue to consider is whether your estate is likely to be subject to estate tax.  As we discussed in our previous article, How to Avoid Estate Tax, the Illinois estate tax exemption is $4 million.   If your estate is worth over $4 million when you pass away, everything over $4 million will be taxable. 

Unlike the federal estate tax exemption, the Illinois Estate Tax exemption is not portable, meaning that spouses cannot automatically take advantage of one another's estate tax exemptions.  However, by creating a separate revocable living trust for each spouse, we can essentially make the estate tax exemption portable. This would give you an $8 million exemption as a couple, rather than leaving you each with a $4 million exemption.  This is called an AB Trust strategy, and it is usually the first line of defense against estate tax.  

‍The bottom line is that if you are using revocable living trusts as an estate tax planning vehicle, the trust should be listed as the primary beneficiary of your life insurance policy as opposed to your spouse.  Unless the trust is the beneficiary of the policy, you will not be able to take full advantage of the portability benefits of the AB Trust strategy.  

You should be aware that death benefit of your husband's life insurance policy would count as part of the estate for estate tax purposes.  When we add the $2 million death benefit, your $500,000.00 money market account, and the value of your house, you are likely getting close enough to $4 million in assets that you may want to consider an AB Trust strategy to raise your estate tax exemption as a couple from $4 million to $8 million.  Again, if you choose to pursue this strategy, then one or both of the trusts should be the beneficiary of the life insurance policy.

Beneficiary Considerations  

If you have comfortably less than $4 million in assets when you include the death benefit of your insurance policy, then estate tax will not be a consideration for you.  Whether to list your trust as a beneficiary of your life insurance policy is a much more personal decision.  

  • Probate

One of the primary benefits of a revocable living trust is to keep your estate out of a costly and time-consuming probate case when you pass away.  The rule in Illinois is that probate is required if you own any real estate outside of a trust or more than $100,000.00 of non-real estate assets outside of a trust or outside of accounts that are directly payable to a beneficiary upon death.  We typically recommend transferring your major savings accounts and real estate into your revocable living trust in order to make probate unnecessary.  However, so long as you have a living beneficiary named on your life insurance policy at the time that you pass, the life insurance policy will be paid directly to that beneficiary and not be counted as part of your estate for the purposes of determining whether probate is necessary.  

Unlike some other types of assets, your life insurance policy does not have to be transferred to your trust to avoid probate. However, if you are not going to transfer the policy to your trust, we always recommend making sure that you have successor beneficiaries listed after your spouse to ensure that there is a living beneficiary able to inherit the death benefit of the policy when you pass so the death benefit will not be dumped into a probate estate. 

So, if the life insurance policy won't affect estate tax or probate if it is left out of the trust, why should you make the trust the beneficiary of a life insurance policy?

  • Control over how the policy proceeds are managed after your death

‍If an individual inherits the death benefit of your life insurance policy, the death benefit will simply be paid out to that individual or their legal guardian.  However, if the trust inherits the death benefit of your life insurance policy, the trustee will be able to control how the money is being handled, according to the terms that you lay out in your trust.

If you have minor children when you pass away, you may not want your life insurance proceeds simply paid out to their guardian.  Check out our article about what happens when minors inherit property in Illinois. In the absence of a trust there are fewer controls on the guardian misusing the child's inheritance.  The inheritance may also be subject to the guardian's creditors.  

If your children are young adults when you pass away, you may not want your children to receive the entire death benefit of the insurance policy all at once.  Our clients will typically choose to have to have their revocable living trusts provide that their children can access 1/3 of the assets in their trust at age 21, 2/3 at age 25, and the rest at age 30.  During this period the trustee will have discretion to pay more than these amounts if he or she believes it is in the child's best interests.  This prevents the children from spending the money irresponsibly.  If the trust is the beneficiary, rather than the child directly, restrictions in your trust such as these will be able to control the use of your life insurance death benefit. 

  • Complex plans for distribution

If you want your life insurance death benefit to go first to your spouse and then to your children in equal shares, this is easy enough to accomplish directly through your life insurance policy.  However, if you have a more complex plan for distribution, such as specific gifts to other friends and family, or distribution of unequal percentages to many of your favorite nieces and nephews, you will likely not be able to accomplish this through naming direct beneficiaries on your life insurance policy.  However, if you make the trust the beneficiary of your life insurance policy, the policy will be distributed according to the terms of your trust, which can be as complex and specific as you like. 

  • Ease of Payment

There is one downside to making a trust the beneficiary of your life insurance policy, and that is that there is more red tape involved in receiving the pay out of the death benefit.  If an individual is named as the beneficiary, he or she will typically receive a check from the life insurance company within a week, without having to jump through many hoops.  If a trust is named as the beneficiary, the trustee will have to provide certain paperwork to the life insurance company and the process can take longer, typically a few weeks to a month. 

For this reason, a married person will typically name their spouse as the direct beneficiary of the life insurance policy and name the trust as the successor beneficiary.  We want the payout to the spouse to be as quick and painless as possible.  However, when the pay out is going to other heirs, we are often willing to sacrifice speed to ensure that your wishes are executed properly.  


To sum up:

  • If estate tax avoidance is part of your strategy, the trust should be the primary beneficiary of your life insurance policy. 
  • You may not want to make the trust the successor beneficiary on your life insurance policy if you have very simple wishes, such as the death benefit being paid directly to your spouse and, if your spouse is not then living, divided equally among adult children in their 30s.
  • If you have young children, or more complex wishes, it typically makes sense to make your spouse the direct beneficiary of the life insurance policy and the trust the successor beneficiary.  

I love answering your questions, so please let me know if you have any further questions about this or any other topic. ​

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