A: No, they generally are tax exempt income to the trustee and to the beneficiary when distributed.
Where proceeds are retained by the trust, earnings on the proceeds are taxed in the same manner as other trust income. 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. Under some circumstances, proceeds of a policy transferred for value to a trust may not be wholly tax exempt.