Life Insurance Considerations for Estate Planning

May 2017

During the estate planning process, we typically will analyze the impact of potential life insurance.  Life insurance policies (if owned individually) are counted towards the decedent’s taxable estate, while the life insurance proceeds are income tax-free to the beneficiaries.  However, there are ways to shift life insurance out of the estate of the decedent, which means it will not be counted toward the decedent’s taxable estate.

Generally speaking, anyone with an estate that may be subject to state or federal estate tax should give consideration to an Irrevocable Life Insurance Trust (ILIT), which can be used to shift life insurance out of the taxable estate.  The ILIT is an irrevocable trust, meaning once it has been created, the policy cannot be transferred back into your own name without potential tax implications.  However, you can control who the beneficiaries are, when the beneficiaries will receive the insurance proceeds from the ILIT, and who will receive and manage the proceeds on behalf of the trust beneficiaries.

Similar to other estate planning tools, an ILIT must be designed and executed properly in order to ensure it will be beneficial to your loved ones. Stay tuned to FMJ’s Trust & Estates blog for more information on estate planning.

This post was written by Trusts & Estates attorneys David Ness and Matt Jensen. If you have any questions or would like to discuss your estate planning options, contact David at david.ness@fmjlaw.com or Matt at matthew.jensen@fmjlaw.com.