Life insurance is often a key component of estate planning, offering financial security to loved ones in the event of your passing. However, simply naming a beneficiary may not provide the level of control or protection you want. A trust can help you bridge that gap. Using a trust to hold your life insurance policy can offer several advantages, such as avoiding probate, reducing estate taxes, and protecting your beneficiaries from creditors.
Given these benefits, you may be asking, “Can I put my life insurance in a trust in Virginia?” The answer is yes—in many cases, it can be a strategic choice. Let’s explore what this process involves and whether it’s right for you.
Why Consider Putting Life Insurance in a Trust?
Placing your life insurance in a trust can offer several advantages, depending on your financial goals and family situation. Here are some reasons people consider this option:
- Avoiding Probate: In Virginia, assets held in a trust typically bypass the probate process, distributing your life insurance benefits more quickly and privately.
- Estate Tax Planning: Although Virginia does not have a state estate tax, the federal estate tax applies to estates exceeding a certain threshold ($13.61 million in 2024 and $13.99 million in 2025). By placing your life insurance in an Irrevocable Life Insurance Trust (ILIT), you may reduce the taxable portion of your estate.
- Controlled Distribution: A trust allows you to specify when and how your beneficiaries receive the life insurance proceeds. This can be particularly beneficial if your beneficiaries are minors or if you want to stagger distributions over time.
- Protecting Beneficiaries: A trust can shield life insurance proceeds from creditors and ensure that funds are used according to your wishes.
Types of Trusts for Life Insurance in Virginia
When placing life insurance in a trust, it’s essential to choose the right type of trust for your specific needs. Here are the most common options:
Irrevocable Life Insurance Trust (ILIT)
An ILIT is a popular option for holding life insurance policies. Once you create an ILIT and transfer ownership of your policy to the trust, you relinquish control of the policy. While this may seem restrictive, it comes with significant benefits:
- Estate Tax Exclusion: Since the policy is no longer part of your estate, the death benefit will not be subject to federal estate taxes.
- Creditor Protection: The funds in an ILIT are generally protected from creditors.
- Structured Payouts: You can dictate how and when your beneficiaries receive the proceeds.
However, if you transfer an existing life insurance policy into an ILIT, the IRS applies a “three-year rule” under Internal Revenue Code § 2035(a). If you pass away within three years of transferring the policy, the IRS will include the policy’s proceeds in your estate for tax purposes, negating the intended estate tax benefits. To avoid this issue, many individuals choose to have the ILIT purchase a new policy instead of transferring an existing one. This strategy allows the policy to be excluded from your estate immediately.
Despite these benefits, ILITs also have drawbacks:
- Loss of Control: Once the policy is placed in an ILIT, you cannot change its terms or beneficiaries or revoke the trust.
- Gift Tax Considerations: Transferring an existing life insurance policy to an ILIT may be considered a taxable gift, though this can often be mitigated through annual exclusions.
- Complex Administration: ILITs require careful management, particularly when making premium payments, to ensure contributions qualify for gift tax exclusions and maintain the trust’s intended benefits.
Revocable Living Trust
A Revocable Living Trust is another option for holding a life insurance policy. Unlike an ILIT, this type of trust allows you to retain control and make changes to the trust during your lifetime. However, there are some significant differences to be aware of:
- Flexibility: You can modify or revoke the trust as your circumstances change.
- Probate Avoidance: Like an ILIT, a Revocable Living Trust can help your beneficiaries avoid probate.
- Control Over Distribution: You can dictate how the proceeds are distributed, ensuring beneficiaries receive funds in a structured manner.
Despite its advantages, a Revocable Living Trust has some limitations:
- No Estate Tax Benefits: Since you maintain control of the policy, the death benefit will still be included in your taxable estate. However, if your estate is under the federal estate tax exemption limit at the time of your death, no estate tax will be assessed.
- Limited Asset Protection: Unlike an ILIT, assets in a Revocable Living Trust are not shielded from creditors during your lifetime.
How to Transfer a Life Insurance Policy to a Trust
If you decide to place your life insurance in a trust, you’ll need to follow a few steps to make the transfer legally effective:
- Create the Trust: Work with Virginia estate planning attorneys to draft the trust document. This step is critical for creating a trust that complies with Virginia law and reflects your intentions.
- Transfer Ownership: For ILITs, you must purchase a new policy or transfer ownership of the life insurance policy to the trust. This involves completing the necessary forms with your insurance company.
- Change the Beneficiary: For both ILITs and Revocable Living Trusts, the trust should be named as the beneficiary of the life insurance policy. This allows the proceeds to flow directly into the trust upon your passing.
- Pay Premiums: If you transfer an existing policy to an ILIT, you’ll need to make premium payments through the trust. This is often done using annual gifts to the trust, which are then used to pay the premiums.
Potential Drawbacks to Consider
While placing life insurance in a trust can offer significant benefits, it’s not without its challenges. Here are some potential drawbacks to be aware of:
- Irrevocability: With an ILIT, once you transfer ownership of the policy, you cannot make changes or revoke the trust.
- Gift Tax Implications: Transferring an existing life insurance policy to an ILIT may be considered a taxable gift. However, this can often be mitigated by using your annual gift tax exclusion ($19,000 per recipient in 2025).
- Cost and Complexity: Creating and maintaining a trust can involve legal fees and administrative responsibilities.
Is a Life Insurance Trust Right for You?
The decision to place your life insurance in a trust depends on your individual circumstances, including your estate size, financial goals, and family dynamics. Here are some scenarios where a trust may be beneficial:
- You have a large estate that may be subject to federal estate taxes.
- You want to control how and when your beneficiaries receive life insurance proceeds.
- You have minor children and want to provide financial protection until they reach adulthood.
Working with Local Trust Attorneys in Virginia
Placing life insurance in a trust involves legal and financial complexities. Consulting local trust attorneys in Virginia can clarify your options, draft the appropriate trust documents, and guide you through the process of transferring your life insurance policy.
Putting your life insurance in a trust can be a powerful way to protect your beneficiaries, reduce estate taxes, and maintain control over your legacy. By weighing the pros and cons of ILITs and Revocable Living Trusts, you can make a decision that aligns with your estate planning goals.
Does Your Life Insurance Support Your Loved Ones the Way You Intend?
Planning for the future means making decisions that protect your loved ones and preserve your assets. At PJI Law, we help Virginians structure their estate plans effectively, including setting up life insurance trusts to avoid probate, minimize estate taxes, and ensure controlled distributions.
Our trust attorneys provide personalized guidance on whether a Revocable Living Trust or an Irrevocable Life Insurance Trust (ILIT) is right for your situation. We handle the legal details so you can focus on what matters most—your family’s financial security.
If you’re ready to explore life insurance trust options in Virginia, call PJI Law at (703) 865-6100 or use our confidential online form to schedule your consultation today.
At PJI Law, you’ll receive personalized service and attention!
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The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information in this post should be construed as legal advice from the individual author or the law firm, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting based on any information included in or accessible through this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country, or other appropriate licensing jurisdiction.
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Fairfax, VA 22030
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