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If you own your life insurance policy, the proceeds will be included in your taxable estate when you die.

Set up an irrevocable life insurance trust and transfer ownership of the policy to the ILIT. This way, the life insurance proceeds are removed from your estate, often saving hundreds of thousands of tax dollars.  This technique is used for an existing life insurance policy, but it also works if you arrange to have the trust purchase a new policy on your life.  The ILIT has been around for years, but this concept has been enjoying a renaissance of late, due to recent tax law changes.  Life insurance proceeds paid out from a policy where you are the insured are exempt from estate tax only if you don’t possess any “incidents of ownership” in the policy.  This extends to more than mere ownership of the policy.  You’re treated as having incidents of ownership if you have the right to:
• Designate or change the beneficiary or beneficiaries of the policy;
• Borrow against the policy or pledge any cash reserve;
• Surrender, convert or cancel the policy, or;
• Select a payment option for the beneficiary or beneficiaries.
You establish the trust and transfer complete ownership of the policy to it. At the same time, you designate a trustee to handle the administrative duties. If you acquire any additional life insurance protection, designate the ILIT as the owner from the outset.  The ILIT may be “funded” or “unfunded.”  With a funded trust, you also transfer assets that may be used to pay the premiums. This could be cash, securities or some other property.  If you use this method, the trust income is generally taxable to you. With an unfunded trust, you don’t move over any other assets to cover the cost. Instead, you effectively pay the premiums out of your own pocket by making annual gifts to the ILIT.  Not only are proceeds from your life insurance policy removed from your taxable estate, the ILIT can be used for a variety of other purposes, especially if you’re among the well-to-do.  You can use an ILIT to keep assets out of the clutches of creditors or to protect against wild spending sprees of offspring suddenly flush with cash.  The life insurance policy doesn’t have to pass through the probate process.  Life insurance may be used to cover any federal and/or state taxes without eroding other assets intended for the family.  Under the current estate tax rules, even wealthy individuals can shield much or all of their assets from federal estate tax. They allow a generous estate tax exemption of $10 million for each individual.  However, this figure is scheduled to revert to $5 million in 2026, so it could become an issue again.  Consider that the top federal estate tax rate is 40%. Thus, if you have a $1 million policy transferred to an ILIT, the estate tax savings may be as high as $400,000.  Also, because future earnings from life insurance proceeds will be taxed to the beneficiaries— not to you in your high tax bracket—an ILIT is
touted by some as a way to avoid income tax and the 3.8% “net investment income tax”.  Currently, the top income tax rate is 37%, but rates could be increased in the future.[/vc_column_text][us_image image=”3800″][/vc_column][/vc_row]