An irrevocable life insurance trust is designed to eliminate estate taxes on the proceeds of life insurance. Life insurance proceeds are not subject to income taxation. However, the proceeds of life insurance policies are subject to estate taxation. In the State of New York there is estate taxation both by the federal government and the state government.
In a life insurance trust, the trust owns the insurance policy and either the party’s children or the trust itself is the beneficiary of the life insurance policy.
It is usually recommended that the trust be the beneficiary of the life insurance policy. If children or a spouse are named as the beneficiary of the policy, those proceeds will be considered as part of the beneficiaries’ taxable estate upon their death. If the trust proceeds are utilized to pay the insured estate taxes and/or final expenses on his or her death, the proceeds would not be part of the beneficiaries’ estate. The drawback of this is if you use the insurance proceeds to pay the estate taxes, it increases the size of the estate of the beneficiary since the beneficiary will not have to utilize any inherited assets to pay the estate taxes.
It should be pointed out if the life insurance policy is in existence already and this policy is transferred to an irrevocable life insurance trust, there is a 3 year look back period before the transfer will be recognized by the Internal Revenue Service. This means if the insured dies within that 3 year period, the Internal Revenue Service will not acknowledge the transfer and the funds will be included in the insured’s estate.
Life insurance trusts are sophisticated estate planning devices and you should consult with an experienced Elder Law attorney to discuss whether this is an appropriate estate planning device for you and your family.
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