The Listen to Lawrence Letter: Should my life insurance be owned by a trust?

READER QUESTION:

Can you please explain why the title on the insurance policy MUST be in the name of the trust? The insurance company is giving me a hard time about this. Thank you!

MY RESPONSE:

The ownership of your life insurance policy may or may not need to be in the name of your trust. It depends entirely on why the trust was created.

If your trust is a revocable living trust, the answer is usually no. The primary purpose of a revocable trust is to avoid probate, and life insurance proceeds avoid probate automatically, as long as the policy has a valid beneficiary designation. In many cases, simply naming the appropriate beneficiary is all that is needed.

If your trust is an irrevocable Medicaid Protection Trust, the answer may be different. One of the reasons for transferring ownership of a life insurance policy to the trust is to protect the policy’s cash surrender value. For Medicaid purposes, the cash surrender value of a life insurance policy is considered an asset, much like money in a bank account. If the trust owns the policy and the transfer is done properly, that cash value may eventually become protected after the applicable Medicaid look-back period.

However, transferring ownership is not always the right answer. Whether the trust should own your policy is a decision that should be made only after reviewing your specific circumstances.

The bottom line is this: don’t assume your policy must be owned by your trust simply because you have one. The correct ownership and beneficiary designations depend on your goals and should be coordinated with your overall estate plan.

I hope this helps!