Preparing for the potential damage that can be done by the federal estate tax is one of the primary objectives when you are planning your estate. As you are inventorying your assets in an effort to determine where you stand in relation to the estate tax exclusion it is useful to recognize that insurance policy benefits paid directly to beneficiaries are subject to the federal estate tax. Think about that – your beneficiaries have the money, your estate has the liability!
One way to protect these assets is to place the insurance contracts into an irreversible life insurance trust. If you do this, after you pass away, the death benefit proceeds will be placed into the trust for the benefit of your beneficiaries and no estate tax liability will be incurred.
When you are drawing up the trust agreement you appoint a trustee. Although you cannot serve as trustee you can select your spouse or your children to serve this role. Of course you must also name a beneficiary and perhaps a secondary beneficiary. Most people will make their spouse the beneficiary and their children the secondary beneficiaries.
With an irrevocable life insurance trust the primary beneficiary – your spouse for example – will be able to benefit from trust resources throughout his or her life without having paid any estate tax on the life insurance proceeds. In addition, since the primary beneficiary does not technically own the resources they are not part of his or her estate. So when the secondary beneficiaries inherit the trust they do so in a tax-free manner.
To gain a more in-depth understanding of how an irrevocable life insurance trust can fit into your estate plan, simply take a moment to arrange for a consultation with a licensed and experienced Oklahoma City estate planning attorney.
Author, President and Founding Attorney
Parman & Easterday