One of the most challenging practical aspects of estate administration is the liquidity gap — the period between a person's death and the distribution of their assets, during which beneficiaries may have urgent financial needs but limited access to funds. Trusts, when properly structured, are one of the most effective tools for addressing this gap.
Understanding how different types of trusts interact with the claims process can help financial planners, estate attorneys, and beneficiaries navigate this period more effectively.
Revocable Living Trusts
A revocable living trust is the most commonly used estate planning tool for avoiding probate and ensuring continuity of asset management after death. Because assets held in a trust pass outside of probate, they can be distributed to beneficiaries relatively quickly — often within weeks rather than the months or years that probate can take.
For families facing immediate financial needs after a death — funeral expenses, mortgage payments, living costs — the liquidity advantage of a funded revocable trust can be significant. The key word is 'funded': a trust that exists on paper but does not actually hold assets provides no liquidity benefit.
Irrevocable Life Insurance Trusts (ILITs)
An Irrevocable Life Insurance Trust (ILIT) is a specialized trust designed to hold a life insurance policy outside of the insured's taxable estate. When the insured dies, the policy proceeds are paid to the trust (not directly to the beneficiaries), which then distributes them according to the trust's terms.
ILITs are primarily used by high-net-worth individuals seeking to reduce estate tax exposure. Because the trust is the policy owner and beneficiary, the death benefit is excluded from the insured's gross estate — a significant advantage for estates that might otherwise face federal estate tax.
For the beneficiaries, the practical effect is that claim proceeds arrive at the trust, which then applies them according to established distribution instructions. Properly structured ILITs can provide both tax efficiency and reliable liquidity for estate expenses.
Trusteed IRAs and Retirement Accounts
Inherited retirement accounts present particular planning challenges under the SECURE Act's 10-year rule, which requires most non-spouse beneficiaries to distribute the full account balance within 10 years of the original owner's death. A trusteed IRA — where a trust is the designated beneficiary — can provide certain controls and protections for the distributions that individual beneficiaries alone cannot achieve.
However, the tax implications of naming a trust as an IRA beneficiary are complex and depend heavily on the type of trust and the beneficiaries it serves. Coordination between the estate attorney and a tax advisor is essential when this structure is being considered.
Practical Guidance for Professionals
For financial and legal professionals working with families post-loss, understanding the trust structures that are already in place is the first step. Many families are not aware of the trusts their loved ones established, or how to activate them after a death.
Working with the family to inventory trust assets, locate the trust document, and identify the successor trustee creates a foundation for the subsequent claims and distribution work. When life insurance is involved, coordinating the claim filing with the trust's requirements — particularly for ILITs — ensures that proceeds flow correctly and that the family's interests are protected.
James Morton
Financial Strategist, BenTrustCo
