Consider An Irrevocable Life Insurance Trust

Life insurance is typically owned by the person whose life is insured. That person usually pays the premiums and controls the designation of the beneficiary. But there’s a potential problem if you own life insurance policies at death: the proceeds will be included in your estate, possibly creating hundreds of thousands of dollars of unnecessary taxes. While there are no income taxes on the proceeds, the estate taxes start at 35% and increase to 55%.

Instead, you can create an irrevocable life insurance trust. The trust owns the policies and pays the premiums. When you die, the proceeds pass into the trust and are not included in your estate. The trust can be structured to provide benefits to your surviving spouse and/or other beneficiaries.

A properly structured trust could save you more than 50% in estate taxes on any insurance proceeds. Thus, having a $1 million life insurance policy owned by an irrevocable insurance trust could reduce estate taxes by more than $500,000. Setting up these trusts can be complicated - be sure to get professional advice beforehand but it’s certainly worth checking out.

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