A good use of life insurance is to help lessen the impact of estate tax. This column begins with a disclaimer that the information I'm going to provide is an overview, and you absolutely MUST speak with an attorney for details and to see if this strategy would work for you.
First, the best estate planning possible should make use of as much estate tax credit for both the husband and the wife through the use of irrevocable trusts and maybe lifetime gifting. We'll talk more about these topics later. Once the estate has been lowered as much as possible, the owner of the estate sets up an irrevocable life insurance trust (ILIT). Then, the trust purchases life insurance itself, insuring the life of the estate owner. Since the trust is irrevocable, it isn't the property of the decedent (the person who dies), and as a result, the life insurance isn't included in the decedent's estate. Instead, the proceeds of the policy can be used to pay the remaining estate tax liability. Consult your attorney about the best ways to pay for the policy.
This is a complicated strategy, but sometimes, it's better than the decedent buying the policy himself. Why? Because in this situation, the life insurance is included in the decedent's estate, and as a result, the proceeds are also subject to additional estate tax. Remember that life insurance is usually exempt from income tax, but it isn't exempt from estate tax unless it's out of the estate. Further, the strategy often won't work well if an existing policy is placed in the trust. Usually, the trust needs to buy the policy, itself. Be careful with it, but an ILIT can often help pay estate tax liability in a cost-effective way.
Be Prosperous!
Peggy
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