Life Insurance Trust could save heirs estate taxes

Few people realize that, even though they believe they have only a modest estate, they could be leaving their families to pay thousands of dollars in estate taxes when they die.

A life insurance policy that is a part of the estate could be one reason for the higher tax liability. While a life insurance policy is not taxable for federal income taxes, it is still considered to be part of your taxable estate and could be subject to estate tax.

One solution to this problem is to create an Irrevocable Life Insurance Trust that will receive the proceeds from a life insurance policy upon your death. With the help of your attorney, a properly drafted life insurance trust keeps the insurance proceeds from being taxable not only to your surviving spouse but also your family at the event of your surviving spouses’ death.

The way this works is an irrevocable trust is created to be the owner and beneficiary of one or more life insurance policies on your life. You will contribute cash to the trust to be used by the trustee to make premium payments on the life insurance policies. If the trust is drafted properly, all contributions made to the trust for premium payments will qualify for the annual gift tax exclusion, ($14,000 exclusion for the 2017 tax year) so you will not have to pay any gift tax on the contributions.

Upon your death, the trust will continue for the benefit of your spouse during his or her lifetime. Your spouse is granted certain beneficial interests in the trust, such as the right to income, limited invasion rights, and eligibility to receive principal. Upon the death of your spouse, the trust assets are paid outright to your descendants/beneficiaries.

As stated above, it is very important to work closely with both your attorney and your CPA to ensure that the trust language is properly documented to ensure the exclusion of your life insurance policy from your taxable estate. For more information, contact us to determine if an Irrevocable Life Insurance Trust is right for you.