Should I Put My Life Insurance Policies In My Living Trust?

BY Vickie Schumacher  

Generally speaking, all titles and beneficiary designations should be changed to your living trust. But there are some exceptions, including IRAs and retirement plan benefits, and your attorney will be able to advise you about them. Regarding life insurance policies, it will depend mostly on the size of your estate—and if it will be subject to estate taxes after you die.

Federal estate taxes must be paid if the net value of your estate when you die is more than the amount exempt at that time. Currently the federal exemption is $5 million, adjusted annually for inflation. (In 2014, the exemption is $5,340,000.) Some states also have their own estate or inheritance tax, so it is possible that your estate could be exempt from federal tax but have to pay a state tax.

To determine the current value of your estate, add your assets then subtract your debts. Include your home, business interests, bank accounts, investments, personal property, IRAs, retirement plans—and death benefits from life insurance policies for which you have any “incidents of ownership.” These include policies you can borrow against, assign or cancel, or for which you can revoke an assignment, or name or change a beneficiary.

If your estate will not have to pay estate taxes, naming your living trust as owner and beneficiary of the policies will give your trustee maximum control over the policies and their proceeds. It also ensures that the court will not be able to control the proceeds if a beneficiary is a minor, incapacitated or no longer living when you die.

If your estate will be subject to estate taxes, it would be better to set up an irrevocable life insurance trust and have it own the policies for you. This will remove the value of the insurance from your estate, thereby reducing the size of your estate and any estate taxes owed so you can leave more to your loved ones. The trustee of this trust will have maximum control of the policies and their proceeds, and the proceeds will not be subject to court interference.

There are some restrictions on transferring existing policies to an irrevocable life insurance trust. If you die within three years of the transfer date, the IRS will consider the transfer invalid and the insurance will be back in your estate. There may also be a gift tax. These restrictions, however, do not apply to new policies purchased by the trustee of this trust.

Keep in mind that estate tax laws and the size of your net estate will likely change between now and the time of your death. If you have a sizeable estate, your attorney will be able to advise you on this and other ways to reduce estate taxes.

 

Disclaimer Notice: It is my intention that the comments, articles, and other information provided on this website are intended to provide you with general information which may be interesting and of value to you. You should not construe any of this information as legal advice or my opinion as it may relate to your specific circumstances. Please feel free to contact me directly if you would like to discuss your own situation and your estate or business planning needs.

 

Generally speaking, all titles and beneficiary designations should be changed to your living trust. But there are some exceptions, including IRAs and retirement plan benefits, and your attorney will be able to advise you about them. Regarding life insurance policies, it will depend mostly on the size of your estate—and if it will be subject to estate taxes after you die.

Federal estate taxes must be paid if the net value of your estate when you die is more than the amount exempt at that time. Currently the federal exemption is $5 million, adjusted annually for inflation. (In 2014, the exemption is $5,340,000.) Some states also have their own estate or inheritance tax, so it is possible that your estate could be exempt from federal tax but have to pay a state tax.

To determine the current value of your estate, add your assets then subtract your debts. Include your home, business interests, bank accounts, investments, personal property, IRAs, retirement plans—and death benefits from life insurance policies for which you have any “incidents of ownership.” These include policies you can borrow against, assign or cancel, or for which you can revoke an assignment, or name or change a beneficiary.

If your estate will not have to pay estate taxes, naming your living trust as owner and beneficiary of the policies will give your trustee maximum control over the policies and their proceeds. It also ensures that the court will not be able to control the proceeds if a beneficiary is a minor, incapacitated or no longer living when you die.

If your estate will be subject to estate taxes, it would be better to set up an irrevocable life insurance trust and have it own the policies for you. This will remove the value of the insurance from your estate, thereby reducing the size of your estate and any estate taxes owed so you can leave more to your loved ones. The trustee of this trust will have maximum control of the policies and their proceeds, and the proceeds will not be subject to court interference.

There are some restrictions on transferring existing policies to an irrevocable life insurance trust. If you die within three years of the transfer date, the IRS will consider the transfer invalid and the insurance will be back in your estate. There may also be a gift tax. These restrictions, however, do not apply to new policies purchased by the trustee of this trust.

Keep in mind that estate tax laws and the size of your net estate will likely change between now and the time of your death. If you have a sizeable estate, your attorney will be able to advise you on this and other ways to reduce estate taxes.

 

Disclaimer Notice: It is my intention that the comments, articles, and other information provided on this website are intended to provide you with general information which may be interesting and of value to you. You should not construe any of this information as legal advice or my opinion as it may relate to your specific circumstances. Please feel free to contact me directly if you would like to discuss your own situation and your estate or business planning needs.