As you approach retirement, one of the most important financial decisions you may face is what to do with your life insurance policy. For many older adults, this policy represents more than just a death benefit. It’s a legacy tool, a safety net, and sometimes a crucial source of liquidity for heirs. One option that financial planners often recommend is placing life insurance in a trust. But there’s a question that catches many off guard: Does it matter when you make this move? In fact, for some, doing it before age 70 could be a decisive factor in how effective that strategy will be.
This timing isn’t just about paperwork. It can influence taxes, creditor protection, Medicaid eligibility, and the amount your loved ones ultimately receive. Let’s unpack what it means to put life insurance in a trust, why age 70 is a commonly discussed threshold, and the pros and cons that might affect your personal decision.
What Does It Mean to Put Life Insurance in a Trust?
When you put life insurance in a trust, you transfer ownership of the policy from yourself to a legal entity—the trust. This can be done through an irrevocable life insurance trust (ILIT) or, in some cases, a revocable trust.
The trust becomes both the policy owner and the beneficiary, and it will control the death benefit according to the instructions you outline. The advantage here is control—your heirs don’t receive a lump sum directly, which can be especially helpful if they’re young, inexperienced with money, or if you want to ensure the funds last for specific purposes.
Additionally, a properly structured trust can remove the policy from your taxable estate, potentially saving your heirs from a hefty estate tax bill. However, the process requires precise legal structuring, and once completed—especially with an ILIT—it cannot be easily undone.
Why Age 70 Is a Key Consideration
Many advisors bring up age 70 as a potential “soft deadline” for transferring a life insurance policy into a trust, and there are a few reasons for that.
First, life insurance premiums tend to be significantly higher in your seventies, which can make maintaining the policy, and therefore the trust, more expensive. If you transfer a policy late in life, you might face issues funding the trust to cover these premiums.
Second, some people hit age 70 and begin reducing or altering their coverage, not realizing that doing so after transferring to a trust can create administrative complications. You may also be dealing with reduced health, which could make qualifying for a new policy impossible if you decide to replace or restructure coverage.
Finally, Medicaid planning often comes into play. For long-term care eligibility, certain asset transfers, including placing a life insurance policy in a trust, can be subject to a “look-back period” that may impact qualification. If you make the move earlier, you’re less likely to face these penalties.
The Potential Benefits of Transferring Before 70
If you’re considering the move, there are several potential advantages to acting before age 70.
- Estate Tax Reduction – By removing the policy from your estate, you may lower your taxable estate value and protect the death benefit from federal or state estate taxes.
- Creditor Protection – In some states, life insurance proceeds are protected from creditors when held in certain trusts. This can be especially important if you or your beneficiaries face legal or financial challenges.
- Medicaid Planning Advantages – If structured early enough, the trust may help shield the policy from being counted as a resource when applying for Medicaid.
- Premium Management – Transferring ownership earlier allows you to lock in lower premiums for the remainder of the policy’s life, potentially saving thousands over time.
- Greater Flexibility in Planning – Before 70, you may still be making broader estate and retirement adjustments. Incorporating your life insurance trust into those plans can ensure everything works together rather than being patched together at the last minute.
The Downsides of Moving Too Early
While early action has its benefits, there are risks to moving your policy into a trust before you’re fully ready. First, an irrevocable trust is just that—irrevocable. Once you transfer ownership, you can’t take it back or make changes to the trust terms without significant legal maneuvering.
Second, if your life circumstances change, such as divorce, remarriage, or new financial priorities, you may find the trust’s rigid rules more restrictive than helpful.
Third, funding the trust to pay ongoing premiums requires discipline. If you fail to properly fund it, the policy could lapse, and rebuilding coverage later in life is often prohibitively expensive.
Understanding the Three-Year Rule
If you already own the policy and transfer it to a trust, the IRS applies the “three-year rule.” This means that if you pass away within three years of the transfer, the policy’s death benefit will still be included in your taxable estate.
This is a major reason why waiting too long, especially beyond age 70, can be risky. If your health is already declining, the likelihood of passing away within that three-year window increases, which could defeat the estate tax advantage of the transfer.
Trust Structures to Consider
When it comes to life insurance, the most common trust type is the Irrevocable Life Insurance Trust (ILIT). Here’s why:
- ILIT: Keeps the policy out of your taxable estate, provides clear control over distribution, and can protect against creditors.
- Revocable Living Trust: Offers more flexibility, but the policy is still considered part of your estate for tax purposes.
- Testamentary Trust: Created after death through your will; however, this doesn’t provide the same lifetime planning benefits as an ILIT.
Choosing the right trust structure should involve discussions with both an estate attorney and a financial advisor, as each option carries unique tax, legal, and administrative implications.
How Premium Payments Work in a Trust
Once your policy is owned by a trust, the trust must pay the premiums. This usually involves you making annual gifts to the trust, which then pays the insurance company.
For ILITs, “Crummey notices” are often used to qualify these gifts for the annual gift tax exclusion. If this sounds complex, it is. Without following these technical rules precisely, you could face unintended tax consequences.
What Happens If You Wait Too Long
If you delay transferring your life insurance into a trust, you may face:
- Higher premiums due to age-related increases.
- Reduced flexibility if health issues prevent changing policies.
- Risk of running afoul of Medicaid’s asset transfer rules.
- Losing the estate tax benefit if you pass away within the IRS’s three-year window.
Waiting also means you may need to rush the process under pressure, which increases the chance of making mistakes that could make the trust invalid or ineffective.
Coordinating With Your Other Estate Plans
A life insurance trust shouldn’t be created in isolation. It needs to align with your will, powers of attorney, healthcare directives, and any other trusts you have in place.
Many retirees find that creating the trust before age 70 allows them to build it seamlessly into a broader estate strategy rather than patching it in at the last minute. This can help avoid conflicting instructions and ensure beneficiaries receive what you intend.
When to Seek Professional Advice
Because the stakes are high and the rules are complex, most experts agree that transferring life insurance into a trust should never be a DIY project.
An estate planning attorney can draft the trust to meet your specific goals, while a tax advisor can ensure you understand the gift tax and estate tax implications. A financial advisor can help you see how the trust fits into your retirement income plan and legacy goals.
Is Age 70 Your Deadline or Just a Guideline?
Age 70 isn’t a magic cutoff, but it’s a useful milestone for assessing whether to act. By that point, health premiums, and estate planning considerations may all be working against you. Acting earlier gives you more options, more flexibility, and more time to reap the benefits of a properly structured trust.
Should You Put Your Life Insurance in a Trust Before Age 70? The Bottom Line
The decision to put your life insurance in a trust is deeply personal, involving legal, tax, and family considerations. While age 70 is not a hard deadline, it is often a practical one, offering the best balance between maximizing benefits and minimizing complications. Acting earlier can help lock in lower premiums, secure estate tax advantages, and integrate the trust into your broader retirement plan without last-minute stress.
Would you feel comfortable locking your life insurance into an irrevocable trust before you reach 70, or would you prefer to keep your options open longer?
Read More:
The Truth About What Happens to Unclaimed Life Insurance
How Changing Your Address Can Affect Your Life Insurance Payout
Riley Jones is an Arizona native with over nine years of writing experience. From personal finance to travel to digital marketing to pop culture, she’s written about everything under the sun. When she’s not writing, she’s spending her time outside, reading, or cuddling with her two corgis.
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