Insurance on your life will be included in your taxable estate if either (1) Your estate is the beneficiary of the insurance proceeds, or (2) You possessed certain "incidents of ownership" in the policy within three years of your death.
Incidents of ownership that will cause the proceeds to be taxed in your estate include the rights to: change beneficiaries, assign the policy, pledge the policy as security for a loan, borrow against the policy's cash surrender value, and surrender or cancel the policy. A life insurance trust is an effective way to keep life insurance proceeds from being taxed in your estate.
The irrevocable life insurance trust owns the policy and receives the proceeds after your death. A properly drafted life insurance trust keeps the insurance proceeds from being taxed in your estate as well as in the estate of your surviving spouse. It also protects the trust beneficiaries against their creditors, including an ex-spouse in the event of divorce. Here's how the irrevocable life insurance trust works.Continue Reading