The proceeds of a life insurance policy are not subject to probate unless you the estate is named as a beneficiary. If anyone else, including a trust, is the beneficiary of the policy, proceeds are not included in the probate estate and are paid to the beneficiary without delay. There is no good reason for naming an estate as beneficiary of an insurance policy. Unless life insurance proceeds are used for estate costs, they will be distributed to someone, eventually. So it seems foolhardy to reduce the amount inheritors receive from your life insurance because of probate costs—or add to the time your inheritors must wait before they get this money.
If your client wants minor children to be the beneficiaries of his/her insurance policy, he/she will need to arrange for the proceeds to be managed and supervised by a competent adult. If not, and the children are not legal adults when your client dies, the insurance company will require a court appoint a property guardian for the children before releasing the proceeds. This necessitates attorney’s fees, court proceedings and court supervision of life insurance proceeds left to benefit your children. There are two ways to prevent this:  name a living trust beneficiary of the policy or  leave the proceeds for the children by using the state’s UTMA directly, naming an adult custodian for the minor child.
If the deceased owned the policy, the full amount of the proceeds is included in the federal taxable estate; if someone else owned the policy, the proceeds are not included. There are two ways to transfer ownership of a life insurance policy:  simply gift (or sell) the policy to another person or persons or  create an irrevocable life insurance trust and transfer ownership to it. If a policy is transferred, it must be done with the knowledge and approval of the insurance company. Your client has the right to assign or give ownership of a life insurance policy to any other adult, including the policy beneficiary (except group policies).
Gifts of life insurance policies made within three years of death are disallowed for federal estate tax purposes (and often for state tax purposes). This means the full amount of the proceeds is included in the estate as if your client had remained policy owner.
Another IRS regulation provides that a deceased person who retained any incidents of ownership of a life insurance policy is considered the owner. Specifically, the policy proceeds will be included in your client’s taxable estate if he/she can:  change or name policy beneficiaries,  borrow against the policy,  pledge (or cash in) any policy cash reserve,  surrender, convert or cancel the policy or  select a payment option for any policy beneficiary.
If a policy with a present value of more than $13,000 is transferred to one person (other than the spouse), a gift tax return must be filed.
Transferring Policy Ownership
Your client can give away ownership of a life insurance policy by signing a simple document called an assignment or a transfer. To do this, notify the insurance company and use its assignment or transfer form. The policy itself will usually have to be changed to specify that the insured is no longer the owner.
After the policy is transferred, the new owner should make all premium payments, unless the policy is fully paid up. If the previous owner makes payments, the IRS might contend the previous owner was keeping an incident of ownership, policy would then be included in the deceased owner’s taxable estate—precisely what the client is trying to avoid. If the new owner does not have sufficient funds to make policy payments, your client can gift the money to be used for these payments.
Life Insurance Trusts
An irrevocable life insurance trust (ILIT) is a legal entity your client creates while live for the purpose of owning life insurance he/she previously owned. Once ownership of the policy is transferred to the trust, it owns the policy, not your client. The proceeds are then no longer part of your client’s estate.
Your client may wish to set up an ILIT if he/she does not want to be the owner but does not have a specific person in mind. The ILIT allows your client to exert control over the policy while avoiding the risks of having the policy owned by someone else—someone who may not pay policy premiums. The ILIT could specify that the policy must be kept in effect while the client is live.
There are strict requirements governing life insurance trusts:  the life insurance trust must be irrevocable and  your client cannot be the trustee, the ILIT must be established at least three years before your client dies. If the trust has not existed for at least three years before the client dies, the trust is disregarded for estate tax purposes and the proceeds are included in the client’s estate.