Life insurance is the ideal vehicle for income replacement. This is why it is important to carry adequate coverage so your family members will be able to weather the storm financially in the event of your passing. It is also used in the field of estate planning to balance inheritances among children, pay estate taxes and for succession planning in small businesses.
The beneficiary of an insurance policy does not have to pay income tax on the proceeds. That’s right – the death benefit is income tax free, at least for now. But that does not mean that there are no tax concerns associated with the purchase of insurance. The proceeds that will be paid out from your policies – the full death benefit – are part of your estate for estate tax purposes if you are the owner of these policies.
You can however create an irrevocable life insurance trust (“ILIT”) and have this entity be the purchaser of your policies, its owner and beneficiary. In this manner you do not own them personally so the proceeds are not part of your estate for tax purposes.
If you already own policies you can place them into the trust. But, if you die within three years of doing so the proceeds are viewed as part of your estate by the Internal Revenue Service.
These trusts can be a useful solution for people who need to carry considerable life insurance. If you would like to learn more about ILITs and other legal instruments that provide tax efficiency, don’t hesitate to pick up the phone to arrange for a consultation with a good Oklahoma City estate planning lawyer.
Author, President and Founding Attorney
Parman & Easterday