Life Insurance Trust

A life insurance trust is often times a good way to avoid some of the estate tax owed once a person dies.  Setting up an irrevocable life insurance trust will allow the proceeds of a life insurance policy to be omitted from the value of the estate and can drastically reduce the tax liability on the estate.

Trust Control

The hallmark of a life insurance trust that will avoid estate taxation is making the trust irrevocable.  For a trust to be irrevocable, the insured person must have no control over the trust after the initial trust creation.  If the insured maintains control over the trust it is a revocable life insurance trust, and the proceeds of the policy will not qualify for the estate exemption (i.e. the proceeds will be included in the value of the estate).

Alternatives to a Trust

One alternative to an irrevocable life insurance trust is to have family members take out a policy on the life of another (i.e. children take out a life insurance policy on their parents) and their parents reimburse them the premiums by giving them cash gifts. 

Insurance Premium Payment Taxation

To avoid the gift tax, the person who is the subject of the policy can give cash to the party who has taken out the policy to pay the premiums.  As long as the amount gifted per individual is under $12,000, the gift tax will not apply.

Life Insurance Trust Legal Help

To maximize the proceeds of your life insurance policy and estate, you should contact an estate attorney who will go through the available options.  There are many different structures that provide tax relief, and a skilled estate attorney will be able to help you make the best decision for your family.