Life Insurance and Living Trust

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
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Life Insurance and Living Trust

Post by diyfp »

Hello kind Bogleheads,

My friend's mother recently passed away at 66.

She had a living trust and also a life insurance policy naming my friend and his brother as beneficiaries.

My friend has been advised to open a bank account under the living trust and put the life insurance money there. Ostensibly to save on taxes.

Two questions:
1. Can he open a bank account under the living trust?
2. If yes to 1, are there any benefits (tax or otherwise) of following the advice he was given over say, opening a brokerage account at Vanguard and putting the money there?

Thank you in advance.
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David Jay
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Re: Life Insurance and Living Trust

Post by David Jay »

Life insurance payouts are normally tax free (federal). What taxes did he think he would avoid?
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Re: Life Insurance and Living Trust

Post by earlyout »

If you friend is the trustee he can open a bank account for the trust (note that it is now an irrevocable trust since the grantor is deceased). The proceeds of the life insurance belong to the brothers since they are the named beneficiaries. Do they want to give the life insurance money to the trust? If they do it will be distributed according to the terms of the trust.
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Re: Life Insurance and Living Trust

Post by Bobby206 »

There is no tax advantage, that I know of, to putting life insurance money into a trust after death. As long as the right beneficiaries got the money I would keep it as is. I would keep life insurance and trust money separate.
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Re: Life Insurance and Living Trust

Post by Gill »

Do you know what happens now with the trust? Does it terminate or continue on for income beneficiaries? There is possibly no need for a bank account depending on the provisions and assets of the trust. No need to open one if not necessary.

As for putting the insurance money in the trust, this advice doesn't make sense. The insurance proceeds belong to the beneficiaries of the life insurance and have nothing to do with the trust. They can do with it whatever they wish, most likely investing it through Vanguard or else opening a bank account in their individual name if that's what they wish.
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