Know How a Life Insurance Trust Works
Many families use a life insurance trust to keep the death proceeds separate from the insured person's estate and, thus, making the proceeds not taxable as part of the estate for U.S. estate tax purposes.
The life insurance trust and other estate planning tools help our clients protect assets and limit the amount of taxes the estate (and, thus ultimately, the beneficiaries) will have to pay. The Houston law firm of Robert M. Mendell, Attorney at Law, P.C., has considerable experience in the creation and drafting of life insurance trusts.
The Main Goal of a Life Insurance Trust Is U.S. Estate Tax Reduction
There are many different estate planning tools available, but it is important to talk with a lawyer who understands these tools in depth, and who can help you make a determination of which tools are best for you and your family.
- By purchasing a life insurance policy through a trust that is properly set up and maintained, the death proceeds will not be a part of the estate and will not be taxed as a part of the estate.
- Annual premium payments can be made to the trust and not be counted as taxable gifts under certain circumstances. With proper utilization of the so-called "Crummey" powers, the premiums can be paid by the donor insured directly into the trust and still have the payments qualify for the annual gift tax exclusion, as long as the beneficiary has the opportunity to withdraw the money and other conditions are properly met.
- Special care must be taken to use separate property cash funds of the donor insured where the spouse is also a beneficiary of the life insurance trust.
- Especially when the insurance premium payments are relatively high, consideration of potential adverse U.S. gift tax consequences to the life insurance trust beneficiaries should be addressed, perhaps entailing the inclusion and implementation of very sophisticated measures such as so-called "hanging powers" within the life insurance trust agreement.
- It is important to structure a life insurance trust (or any trust) so it complies with tax law and meets your objectives. The trust is also referred to as an ILIT — irrevocable life insurance trust.
Robert M. Mendell is an attorney and a CPA. Mr. Mendell is also board certified as a tax law specialist in Texas. Contact our office by e-mail or by calling 713-888-0700.