| Estate & Gift Tax / Life insurance trusts |  |
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Few people realize that, even though
they may have a modest estate, their families may owe hundreds of
thousands of dollars in estate taxes because they own a life insurance
policy with a substantial death benefit. This is so because life
insurance proceeds, while not subject to federal income tax, are
considered part of your taxable estate and are subject to federal estate
tax at rates from 37% to 55%. The solution to this problem is to
create an irrevocable life insurance trust that will own the policy and
receive the policy proceeds on your death. A properly drafted life
insurance trust keeps the insurance proceeds from being taxed in your
estate as well as in the estate of your surviving spouse. It also
protects the trust beneficiaries from their own "excesses",
against their creditors, and in the event of divorce. Moreover, the
trust also provides reliable management for the trust assets. Here's how
the irrevocable life insurance trust works. You create an irrevocable life
insurance trust to be the owner and beneficiary of one or more life
insurance policies on your life. You contribute cash to the trust to be
used by the trustee to make premium payments on the life insurance
policies. If the trust is properly drafted, the contributions you make
to the trust for premium payments will qualify for the annual gift tax
exclusion, so you won't have to pay gift tax on the contributions. The life insurance trust typically
provides that, during your lifetime, principal and income, in the
trustee's discretion, may be paid or applied to or for the benefit of
your spouse and descendants. This allows indirect access to the cash
surrender value of the life insurance policies owned by the trust, and
permits the trust to be terminated if desired despite its being
irrevocable. On your death, the trust continues for the benefit of your
spouse during his or her lifetime. Your spouse is given certain
beneficial interests in the trust, such as the right to income, limited
invasion rights, and eligibility to receive principal. On the death of
your spouse, the trust assets are paid outright to, or held in further
trust for the benefit of, your descendants. If you own a life insurance policy with a significant death benefit, an irrevocable life insurance trust may be of substantial benefit to you. |
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