Insurance premiums & insurance trust

[Jill Graff]

If an irrevocable insurance trust pays the insurance premiums (money not transferred in from grantor annually), are those premiums deductible to the trust?

Thanks in advance.

[Zee]

Premiums are not deductible expenses

Based on my limited research, here's what I learned. Life Insurance Trusts are Grantor Trusts. The trust receives the money to pay premiums from the Grantor as a "gift" subject to the limitations. Since it is a Grantor Trust all items of income, deductions, and credit are reported on the grantor's individual return. Life Insurance trusts generally have no income and the gift is not a deduction. If the trust obtains a TIN, the IRS may expect an annual fiduciary return and it will require an explanation why none is required. A simple response letter to any inquires should suffice.

[Jill Graff]

The original grantor is not putting additional money into the trust to pay the premiums. When the trust was set up, money was transferred to the trust. Since then, the trust pays the premiums. Because of the original cash investment, the trust has been filing Form 1041s because there has been enough interest and dividend earnings.

[Zee]

The original grantor is not putting additional money into the trust to pay the premiums. When the trust was set up, money was transferred to the trust. Since then, the trust pays the premiums. Because of the original cash investment, the trust has been filing Form 1041s because there has been enough interest and dividend earnings.

OK. It sounds like this is what is known as a "funded life insurance" trust. I'm no expert here, but maybe the little research I've done will help the thought process. Here's what I've read:

"In a funded life insurance trust, the grantor not only transfers the life insurance policy to the trust, but also transfers other property to the trust from which the premium payments may be made. The property may be in the form of cash, securities or some other asset. The major drawback of the funded life insurance trust is that the trust income may be taxed to the grantor if it can be used to pay premiums on a policy on the life of the grantor or the spouse".

It appears that the premium payments made would be taxable income to the grantor and treated as a gift to the trust subject to the gift limitations. I'm still not sure this answers the question of the deduction at the trust level, but since all income/expenses flow-thru to the grantor, it doesn't seem to make sense it would be deductible.

[Burke]

A trust cannot deduct life insurance premiums as an expense to reduce taxable income.