Can a Trust Own Key Person Life Insurance?

The short answer: a trust can own a key person policy

Can a trust own key person life insurance? Only in certain cases. Under Fla. Stat. 627.404, a trust may own a life insurance policy and be named as its beneficiary when the trust has an insurable interest in the insured. One example is where the insured is the grantor of the trust, an individual closely related by blood or law to the grantor, or an individual in whom the grantor otherwise has an insurable interest, and the proceeds are primarily for the benefit of trust beneficiaries who have an insurable interest in the insured. The trustee acts for the trust, and the trust document controls how the money is used.

Ownership is only one piece. A key person policy has three roles. The owner controls the policy, the insured is the person whose life is covered, and the beneficiary receives the death benefit. A trust can fill the owner or beneficiary role, but each role carries its own rights and duties. Mixing them up is where most problems start.

This page offers general information about life insurance ownership and tax questions, and what to bring to a coverage review. Ownership comes first. Tax comes second.

How key person coverage is usually owned

A business usually owns key person life insurance. The policy covers an essential owner, officer or employee, and it helps the business cope financially if that person dies. The business typically owns the policy, pays the premiums and is the beneficiary.

Florida law allows this setup. Under Fla. Stat. § 627.404, an individual party to a contract for the purchase or sale of an interest in any business entity has an insurable interest in the life of each other party to such contract, for the purpose of such contract only. Separately, under Fla. Stat. § 627.404, a business entity has an insurable interest in the life, body, and health of any of the owners, directors, officers, partners, and managers of the business entity or of any affiliate or subsidiary of the business entity, or of its key employees or key persons, if consent is obtained in writing from the key employees or persons before the insurance is purchased. The business must get written consent from the key employee or key person before buying the coverage. Fla. Stat. § 627.404 sets that rule.

Insurable interest is what makes the policy lawful. The law says the insurable interest does not have to continue after coverage starts. That matters if the business changes later.

The owner choice affects three things. It decides who pays premiums, who receives the money, and who can change or cancel the policy. Those answers should match the business’s records. When they don’t, the policy can become hard to administer.

When a trust becomes the owner or beneficiary

A trust is often used when a policy must fit a larger plan. Three situations come up most. A buy-sell agreement may need funding so the surviving owners can buy a deceased owner’s share. A family business may be planning succession. Or the beneficiary may be a minor or someone who needs help managing money.

Florida law also covers trusts. Under Fla. Stat. § 627.404, a trust, or the trustee of a trust acting in a fiduciary capacity, can have an insurable interest in the life of an insured under a life insurance policy owned by the trust when the insured is the grantor, a close relative of the grantor, or someone the grantor has an insurable interest in. The proceeds must mainly benefit trust beneficiaries who have an insurable interest in the insured.

The trustee holds the policy, pays premiums from trust funds, and follows the trust terms after the insured dies. The trust document and the buy-sell agreement must match on who gets paid and how the money is used. If they conflict, the business and the family can end up in disagreement at the worst possible time.

Tax and transfer questions to review with your CPA

Moving an existing policy to a new owner can change its tax treatment. Federal law includes a transfer-for-value rule, and it has exceptions. Review any transfer with your CPA before you sign anything.

Ownership also affects estate tax. Under 26 U.S.C. § 2042, the gross estate includes life insurance proceeds receivable by other beneficiaries, to the extent of the amount receivable, when the decedent held incidents of ownership at death. IRC § 2042 reads: “For purposes of the preceding sentence, the term “incident of ownership” includes a reversionary interest (whether arising by the express terms of the policy or other instrument or by operation of law) only if the value of such reversionary interest exceeded 5 percent of the value of the policy immediately before the death of the decedent.” Under IRC § 2042(2), proceeds payable to beneficiaries other than the executor are included in the gross estate only for policies on the decedent’s life with respect to which the decedent possessed at death any of the incidents of ownership, exercisable either alone or in conjunction with any other person.

Premiums need review too. Under 26 U.S.C. § 264, no deduction is allowed for premiums on a life insurance policy when the taxpayer is directly or indirectly a beneficiary. Gifts to a trust that pays premiums can raise gift tax questions. The IRS states the gift tax annual exclusion is $19,000 per donee for 2026.

Our CPA review covers how these items affect the business and the trust’s records.

Common mistakes when a trust owns a policy

The first mistake is naming the trust as beneficiary without confirming the trust is current and is the intended payee. Check that the trust is signed, in effect, and named the same way on the policy form.

The second mistake is a disagreement over premiums. The grace period is a safety window, not a funding plan. If the trust and the business each assume the other will pay, a missed premium can go unnoticed.

The third mistake is forgetting updates. A signed buy-sell agreement, a business sale, or a new trustee can each change who should own the policy or collect on it.

The fourth mistake is waiting. Issue may depend on insurability. A trust set up after a health change may not be possible on the same terms.

Questions to bring to a coverage review

A coverage review is our first meeting on a case. Bring answers to these questions so the discussion stays specific.

• Who is the insured, and what role does that person play in the business?
• Who should own the policy: the business, the trust, or the other owners?
• Is there a buy-sell agreement or estate plan the policy must fit?
• Who will pay the premiums, and from which account?
• Does the trust document allow the trustee to own and collect on life insurance?
• Which policy type fits the timeline and cash flow, such as whole life insurance or term life insurance?

The NAIC Life Insurance Buyer’s Guide explains term and permanent coverage, riders, and questions to ask before buying. It’s a useful companion to these questions.

Bring your situation to a coverage review

You may be dealing with a partner’s illness, a recent death, or a trust someone else drafted. That is a hard place to make a decision. You may also be trying to protect the business and your family at the same time.

If you’re ready to talk through the ownership, beneficiary and premium questions, contact NR CPAs & Business Advisors for a coverage review. Insurance is offered by the licensed agent, Nischay Rawal, separately from the accounting practice. Our team serves clients in Florida and Miami.

For background on the coverage itself, read our key person life insurance guide.