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What is a life insurance trust?
Death benefits paid on a life insurance policy pass to the beneficiaries of the policy free of income taxes. But life insurance proceeds may be subject to federal estate taxes instead.
You can make sure that your life insurance pays your beneficiaries free of both federal estate taxes and income taxes by having your insurance owned by an irrevocable life insurance trust. Since the trust is considered the owner of the life insurance when you die, the life insurance is excluded from your gross estate unless you die within three years of the transfer. In that case, the entire value of the policy is brought back into your estate for federal estate tax purposes.Remember: If your estate’s value does not exceed $2 million in 2008, there won’t be any estate tax. This amount rises to $3.5 million for 2009. You won't have to worry about federal estate tax in 2010, but it will be reinstated in 2011 unless the laws change.
To guard against such a trap, some financial experts say that you should have the trustee of your irrevocable life insurance trust purchase a new policy on your life so that if you die within three years, the policy is excluded from your estate.Return to Questions
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