Posted by: Woodfork Law | March 12, 2013

Life Insurance in Estate Planning

Life insurance can be a very important tool in estate planning.  Often, when someone passes, the surviving spouse must pay expenses, debts, ongoing bills, and support children.  If the estate doesn’t have liquid assets, life insurance can provide cash.

But, there is a problem with life insurance in an estate plan.  While it is true that when life insurance proceeds are left to a spouse, there is no tax because of the marital deduction; however, insurance proceeds will be included in the surviving spouse’s estate for tax purposes.

To prevent taxes from taking a big chunk of your family’s estate when the surviving spouse passes, you may consider an Irrevocable Life Insurance Trust (ILIT).  An ILIT is an irrevocable trust that puts the proceeds of life insurance outside of both the husband and wife’s estate.

However, the most important aspect of the ILIT is that the trust is irrevocable.  This means once the life insurance policy is placed in trust it cannot be changed.  Another important aspect of the ILIT is that the decedent may not retain any incidents of ownership in the insurance policy, and ownership of the policy must have been transferred at least 3 years before death.  If these conditions are satisfied, life insurance proceeds may be placed outside of both spouses’ estates.


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