Using Life Insurance and Irrevocable Trusts in Estate Planning
by Kira S. Masteller
Continuing with Part 2 of our Gift Tax and Estate Planning blog series (we discussed Living Trusts in Part 1 of the series), we now turn to life insurance – one more helpful tool in accomplishing your goals – if used in conjunction with an irrevocable life insurance trust.
Many people own life insurance so that their family will have sufficient capital to replace their income for a specific period of time. Others own life insurance to enable a business partner to buy out the family’s interests in a jointly owned company upon their death. Still others have life insurance specifically to pay estate taxes.
However, a problem arises if you own your life insurance policy. The death benefit of your life insurance will be included in your estate for estate tax purposes if you are the designated Owner. You might not have a taxable estate with your home, savings and retirement, but when you add your $1,000,000 death benefit to your estate, your tax situation changes.
You can avoid including life insurance in your taxable estate by using an irrevocable life insurance trust. An irrevocable trust can be set up specifically to own your life insurance and receive the death benefit.
You cannot be the Trustee of the trust, but you can appoint a trusted family member, friend, or professional Trustee who will own the life insurance on your life as Trustee, pay the premiums annually (which you will gift to the Trust each year), and who will ultimately file a claim upon your death and receive the insurance proceeds available for your family, or to pay estate tax as you plan.
The use of a life insurance trust can determine whether or not you have a taxable estate, as well as provide liquidity to an estate that is already taxable. It is an inexpensive tool available to anyone who is going to purchase life insurance or who already has life insurance.
There are specific Internal Revenue Code rules that must be followed with respect to a life insurance trust, but they are well worth the cost and effort when you are saving up to 40 percent in estate taxes on the life insurance proceeds. Contact me if you have any questions regarding how best to maximize your tax savings.
In the next installment of this series, I’ll be blogging about Designated Beneficiary Assets, specifically, income tax, capital gains tax and estate tax.
Kira S. Masteller is a Gift Tax & Estate Planning Attorney in our Trusts and Estate Planning Practice Group. Email her at firstname.lastname@example.org for more information.