Could Not My Heirs Own My Insurance Instead of Using a Trust?

If you made one or all of your heirs the owners of the policy, you would be taking many risks. If you have several heirs, it is cumbersome to make gifts to all and then for all of them to get together to pay the insurance premiums. However, if you only name one heir for simplicity’s sake, you risk that one heir refusing to share the proceeds with the others when you die. Also, sharing the proceeds very well could be a taxable gift on his or her part. 

Furthermore, before you die, if your heirs own the policy, they could cash it in any time and frustrate the purpose of the policy – to pay the estate taxes.

Probably worst of all, if your heir had financial problems, such as an IRS problem or a bankruptcy, the insurance would be seized by his or her creditors. You probably trust this person now, but you never know what problems may crop up later.

On the other hand, an insurance trust is a safer alternative. You would still name the same one or more heirs as the trustee(s) to take out the policy and run the trust (generally the same as the successor trustee(s) under your living trust). However, the trustees would have a duty to act properly and could not change who would get the money in the end. Moreover, if any trustee had financial problems, their creditors could not touch the insurance trust assets. Therefore, the insurance trust allows you to better assure that your intent is carried out.