Proceeds from life insurance policies are distributed directly to the named beneficiaries upon your death. They are not governed by your Will and do not have to be probated before being distributed.
But that doesn’t mean your heirs won’t pay tax on those proceeds. Quite the contrary, the value of the policies will be added into your estate specifically for estate tax purposes.
Fortunately, there’s a way to avoid paying those extra taxes.
An Irrevocable Life Insurance Trust can act as a pass-through entity for your policy. Simply transfer ownership of your policy to your chosen trustee and make the Trust the beneficiary.
This removes any control you have over the policy and thus, it is no longer considered part of your estate.
Of course, this means that you won’t be able to change the policy down the road if you change your mind and you’ll need to be able to trust your trustee completely as he or she will be the one to have control of the policy and its distribution.
One final caveat: you must live at least another three years after the transfer. If not, the transfer won’t be recognized and the proceeds will be made part of your estate.
To learn more about ways to minimize estate taxes, contact our office today.