Inter‑Vivos Revocable Funded Life Insurance Trust: A Practical Guide

What Is an Inter‑Vivos Revocable Funded Life Insurance Trust?

An inter‑vivos revocable funded life insurance trust (often called a "revocable life insurance trust" or RLIT) is a legal entity created during a person's lifetime that holds a life insurance policy. Because the trust is revocable, the grantor can alter or terminate it while alive, and because it is funded, the grantor contributes cash or other assets to pay the policy premiums.

Why Use This Trust Structure?

There are several strategic reasons to place a life insurance policy in a revocable trust:

• Asset protection: The policy's proceeds are shielded from probate and creditors.
• Tax efficiency: The trust can be structured to keep the policy's death benefit outside the grantor's taxable estate.
• Control: The grantor can set how and when beneficiaries receive the death benefit.
• Simplicity: Premiums can be paid directly from the trust, reducing paperwork for the policyholder.

Key Features of the Trust

Revocability

The grantor retains the right to change beneficiaries, alter terms, or dissolve the trust. This flexibility is why it's called a "revocable" trust.

Funding the Policy

Premiums are paid from the trust's assets, which may include cash, securities, or other property. The trust's trustee manages these funds to ensure timely premium payments.

Ownership and Beneficiaries

The trust, not the individual, becomes the policy owner and insured. Beneficiaries—often family members or charitable organizations—receive the death benefit upon the insured's death.

How to Set Up an RLIT

Step 1: Choose the Right Trustee

Select a trustworthy individual or institution to manage the trust's assets and premium payments.

Step 2: Draft the Trust Agreement

Work with an estate planning attorney to create a document that defines the trust's purpose, revocation rights, and beneficiary designations.

Step 3: Purchase a Policy

Coordinate with a life insurance provider to buy a policy in the trust's name. The insurer will require the trust agreement as proof of ownership.

Step 4: Fund the Trust

Transfer assets into the trust to cover future premiums. Consider a systematic funding plan to avoid large cash outflows.

Step 5: Maintain the Trust

Keep records of premium payments, policy statements, and any changes to the trust document.

Common Misconceptions

• "It's a tax loophole." While the trust can reduce estate taxes, it must comply with IRS rules; otherwise, the benefits can be lost.
• "The policy is always out of the grantor's control." Because the trust is revocable, the grantor can modify or terminate it.

When an RLIT Is Not Ideal

People with very simple estates, no life insurance, or who cannot afford the trust's setup costs may find this structure unnecessary. In such cases, a standard life insurance policy with a designated beneficiary may suffice.

Conclusion

An inter‑vivos revocable funded life insurance trust offers flexibility, tax advantages, and protection for those looking to maximize the value of a life insurance policy. By working with experienced professionals and following a clear setup plan, individuals can ensure their beneficiaries receive the intended benefit efficiently and securely.

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