The Office of General Counsel issued the following opinion on August 17, 2004, representing the position of the New York State Insurance Department.
Re: Life Insurance Policy with Trust as Beneficiary
May the proceeds of an insurance policy on the life of the grantor of an irrevocable trust be paid into the trust as beneficiary of the policy to be distributed in accordance with the trust documents?
Yes. The proceeds of a life insurance policy may be paid into the trust as the designated beneficiary on the policy for distribution in accordance with the trust documents.
An individual establishes a trust and names the trustee and the beneficiaries of the trust. The trust, upon the grantor's request, buys a life insurance policy on the life of the grantor. The trust is the owner and the beneficiary of the policy. The proceeds of the life insurance policy will be paid to the trust as beneficiary to be distributed in accordance with the trust agreement.
The grantor of a trust, on his/her own initiative, may instruct the trust to purchase a life insurance policy on the grantor's life designating the trustee as the beneficiary. N. Y. Ins. Law § 3205(b)(1) (McKinney 2004) provides:
Any person of lawful age may on his own initiative procure or effect a contract of insurance upon his own person for the benefit of any person, firm, association or corporation. Nothing herein shall be deemed to prohibit the immediate transfer or assignment of a contract so procured or effectuated.
N.Y. Est. Powers & Trusts Law § 13-3.3(a)(1) (McKinney 2001) provides:
The proceeds of thrift, savings, pension, retirement, death benefit, stock bonus and profit-sharing plans, systems or trusts, of life, group life, industrial life or accident and health insurance policies and of annuity, endowment and supplemental insurance contracts (hereinafter referred to as "proceeds") may be made payable to a trustee designated as beneficiary in the manner prescribed by this section and named as:
(1) Trustee under a trust agreement or declaration of trust in existence at the date of such designation, and identified in such designation, and such proceeds shall be paid to such trustee and be held and disposed of in accordance with the terms of such trust agreement or declaration of trust, including any amendments thereto, as they appear in writing on the date of the death of the insured, employee or participant. It shall not be necessary to the validity of any such trust agreement or declaration of trust that it have a trust corpus other than the right of the trustee as beneficiary to receive such proceeds.
In accordance with this section the designation of a trustee as beneficiary of life insurance proceeds must be preceded by a trust instrument, which is identified in the designation. See Matter of Stein, 131 A.D.2d 68, 520 N.Y.S.2d 157 (2d Dep't 1987), appeal dismissed, 72 N.Y.2d 840, 530 N.Y.S.2d (1987).
The proceeds of the life insurance policy can be paid to the trust as beneficiary and administered in accordance with the trust documents, as they appear in writing, through the date of the insured's death. 27B Carmody-Wait2d § 164:54 (West 2004).
This opinion is limited to an interpretation of the N.Y. Insurance Law. The inquirer may wish to consult an attorney who can advise the inquirer on the law of trusts and the taxation implications of the inquirer's proposal. Also enclosed are several articles on this subject that may be of interest.
For further information one may contact Supervising Attorney Joan Siegel at the New York City Office.