A primary estate planning goal is to minimize the amount of taxes that have to be paid out of the estate.
Consider the proceeds from your life insurance policy after you are gone.
Often a life insurance policy proceed that gets paid out can be quite heavy and big. In fact, it’s often one of the biggest pieces of a person’s estate when they pass.
Now we know that life insurance proceeds are nontaxable like income (where income tax applies) when they get paid out or released by the insurance company. But, life insurance proceeds will be counted as a value or asset in the estate. And we know that because of estate taxes that the entire taxable estate will be taxed by the federal government.
Therefore we need to find a way to get that life insurance policy to not be included as a portion of the estate taxation. And the best way to do this is to create an irrevocable life insurance trust.
What were going to do is take an already existing policy and give it to and your revocable trust. That your revocable trust is going to have a trustee that is not going to be you. It can be a family member although that’s not recommended.
And that trustee is going to make sure that the cash proceeds of the trust asset and life insurance policy get paid out to the beneficiaries in a matter that you pick.
Requirements of an Irrevocable Life Insurance Trust
To remove a life insurance proceeds from your estate to the use of your revocable life insurance trust we have to do a few things exactly right. These include:
- Making the trust your revocable: now that’s just what it sounds like. And your revocable trust is one that you can’t go back and change. Once it’s done it’s done, it can’t be revoked or modified.
- We need to have an assignment of any existing policy: if we want to use a pre-existing policy, you the owner will need to live for at least three years after this estate plan for the policy proceeds to be excluded from the estate. If the trustee purchases a new plan and puts it in trust, the policy proceeds will not be taxed when times comes your beneficiary claims for a death benefit.
- To make trust agreement work, the trustee needs to be the owner of the policy not you. The trustee will be an actual possession of the insurance policies and will pay all premiums on the policy (which are funded by gifts from you the owner).
- Trustee responsibilities gets a little strange. The trustee has the requirement of notifying the future beneficiaries that they have withdrawal rights to any payments that are in that bank account set up by the trustee that are used to pay the insurance premium on the life insurance policy. We don’t have to worry about this really happening, because we notify the beneficiaries in advance that if they take the money out of the account then no further premium payment towards the policy will be made by the trustee and therefore the policy won’t go into effect down the line.
- Finally, the proceeds of the life insurance policy need to actually go to the beneficiaries. The trustee is not allowed to use these proceeds from the life insurance policy to pay any federal estate taxes that may come due. Got to keep these separate.
A little bit of planning and the use of an error revocable trust can save lots of money down the line and estate planning taxes. To be sure, you may also consult legal expert to help you on your life insurance matter.