Life Insurance Trust
If done accurately, you can let your life insurance be in a life insurance trust. Once that life insurance trust is in existence, that life insurance, if you die, is payable to the trust beneficiaries, which may be the same people you were going to leave that life insurance to anyway. Because it is in the irrevocable life insurance trust that receives the proceeds, they’re payable through the trust to the beneficiaries.
Due to that irrevocable trust, the money can be excluded from your taxable estate. It’s crucial to note that this has to be an irrevocable trust, which means it can’t be changed. Irrevocable trusts get a bad rap because people fear the inability to make any changes. But it takes that irrevocability factor takes the trustor out of it, enough for the government to consider the trust the owner of that policy and not the trustor as the owner. When created appropriately, there’s no need to fear the fact that the trust is irrevocable. If you change your mind and can’t change the trust, then you don’t fund that trust by changing the life insurance instead.
Also, there’s a difference between transferring an existing life insurance policy to an ILIT versus having an ILIT purchase a new policy. If you are moving a current life insurance policy into the ILIT, you have to live three years after the transfer. Then the proceeds will pass outside your estate. If instead, you’re taking out a new life insurance policy with the trust as purchaser and owner, there is no three-year retirement. There are yearly requirements concerning notifications to beneficiaries, but the notices are reasonably simple to do.
Once those annual requirements are met, those funds are excludable from the taxable estate. So, if the life insurance was the culprit that was going to put one over the threshold, you can be brought back down below that threshold because we’ve excluded the life insurance, and saved a ton of money on estate tax.
If you might be over the allotted cap threshold because of different types of assets, where the life insurance may only play a small part, and you have cash or equity assets, namely real estate, that puts you over that threshold, we can look at ways to try and reduce or eliminate estate taxes through other types of trusts that don’t deal specifically with life insurance.