|Understanding the threat of estate taxes on your life insurance
your first step in protecting these funds from unnecessary taxation. The
next steps are determining the appropriate ownership of your policy and
selecting an appropriate beneficiary. While there are other alternatives,
the life insurance trust can help avoid potential threats to the policys
What Threats Exist Besides Estate
are many factors that may undermine the financial security provided by
the proceeds of your life insurance policy. Beyond estate taxes, there is
the potential for probate, gift taxes, financial mismanagement, and misuse.
Proper planning is necessary to help avoid these
from yourself, there are three practical options for the ownership of
your life insurance:
you choose your spouse to be the owner and beneficiary of a policy on
your life, the proceeds of the policy will be subject to estate taxes and
perhaps probate administration when he or she eventually dies. In addition,
he or she will be responsible for investing the proceeds of your policy.
Make sure your spouse is prepared and has the willingness to handle these
a child as owner and beneficiary can lead to problems if the child
lacks the experience for such a designation. You must be able to rely on him
or her to maintain the policy and avoid letting the policy lapse. In
addition, since your child will be the legal owner of the policy proceeds,
you must be sure that he or she will be willing to supply necessary funds to
the estate to settle taxes, fees, and other expenses.
An Irrevocable Life Insurance Trust
irrevocable life insurance trust can help avoid these threats to your
policys proceeds. Because the trustee must manage the trust for your
benefit, it helps ensure the availability of liquid funds when they are most
needed. And because the trust is irrevocable and is the owner and
beneficiary of your policy, the proceeds escape estate taxes in most cases.
The trust arrangement allows the proceeds to avoid probate administration.
And the trust can allow for the professional management of the proceeds to
help ensure the livelihood of your survivors. The use of a life insurance
trust can provide an opportunity for families to utilize the benefits of
their life insurance.
in mind that the cost and availability of life insurance depend on
factors such as age, health, and the type and amount of insurance. Before
implementing this strategy, it would be prudent to have the policy approved.
In addition, you should seek professional advice from an attorney before
establishing such a trust.
© 2003 Emerald
A taxable gift from the owner to the beneficiary may result when the
owner, the beneficiary, and the insured are all different parties. To
minimize the threat of gift taxes, the owner of the policy should be the
beneficiary of the policy.