153 / Are death proceeds of life insurance taxable income if they are payable to a trust?

No, such proceeds generally are tax-exempt income to the trustee and to the beneficiary when distributed ( Q 63, Q 65).

When proceeds are retained by the trust, earnings on the proceeds are taxed in the same manner as other trust income.¹ The $1,000 annual interest exclusion, available where insurance proceeds are payable to a surviving spouse of an insured who died before October 23, 1986, under a life income or installment option, is not available if the proceeds are payable to a trust ( Q 71). Under some circumstances, proceeds of a policy transferred for value to a trust may not be wholly tax-exempt ( Q 279, Q 282).

1.     IRC § 101; Treas. Reg. § 1.101-1.