Gregory S. DuPont
Estate Planning for Your Life Insurance Policies
You probably know that the death proceeds of your life insurance policies are generally not considered taxable income to your beneficiaries. However, if at the time of your death, you have made your estate the beneficiary or retain incidents of ownership in a policy (such as the right to any cash values, the naming of beneficiaries, and the right to take out policy loans), the proceeds of the policy will generally be included in your estate for federal estate tax purposes.
Consequently, if your personal life insurance policies will substantially increase the value of your assets, you may want to consider transferring the ownership of those policies to reduce your total taxable estate. In order to exclude the proceeds from your taxable estate, you must relinquish all incidents of ownership and continue to live for at least three years after any transfer.
A properly structured irrevocable life insurance trust (ILIT) is one mechanism that can help ensure all incidents of ownership are eliminated. Although this approach necessitates relinquishing ownership and control of the policy, the resulting gain may be worth these tradeoffs.