Life Insurance Trust
Often, the federal government could tax half of the value of an estate. That's why life insurance is a time-tested strategy in proper tax planning. By getting a life insurance trust, after death, ownership is transferred to the trust, leaving it with all of the estate taxes. The proceeds are exempt from income tax whether you decide to do this or not. The estate tax rate is 46%, so by having a life insurance trust, your family will end up saving hundreds of thousands of dollars in estate taxes.
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Considerations to Make for a Life Insurance Trust
Before deciding to go with a life insurance trust, you should consider some things first. When getting this, you are not able to change the beneficiary of the policy; the trust is the beneficiary. You are able to designate the beneficiaries of the trust to be your family and children, but if situations change after the policy is set up, you are unable to adjust it.
You are also unable to borrow money from the policy. Before, you were able to borrow against your insurance policy, but this option cancels that benefit. If the policy allows you to borrow money, you will be deemed one of the owners of the policy for estate tax purposes.
You are not allowed to transfer an existing policy to the trust unless you live for an additional three years. If you transfer an existing policy and die within the three year period, you will be treated as the owner of the estate and will be taxed.
If you survive the three years, you'll develop a taxable gift in the amount of the policy’s cash value. This is usually preferred over having the entire face value subjected to estate taxes.
Final Things to Know about Life Insurance Trusts
- The life insurance trust needs to be irrevocable
- Your premium payments may end up totaling more than what you would save through estate tax exemptions
- You will need to hire or find a trustee
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