How To Avoid Estate Taxes – What Is A Life Insurance Trust?
If you are wealthy, you may need a life insurance trust to shelter financial assets from estate taxes. Estate taxes in the United States do not usually apply to spouses or federally-recognized charities, but any individual with assets greater than $5.34 million may force heirs to pay a top tax rate of 40%. Fortunately, an irrevocable life insurance trust can preserve a significant amount of an estate for the beneficiaries. However, like any financial instrument, there are pros and cons to life insurance trusts.
What Are Irrevocable Life Insurance Trusts?
An irrevocable insurance trust means that, once your life insurance beneficiaries are named, they cannot be changed regardless of changes in family circumstances. The policy must be endowed (have cash value) at the time the trust is set up, and if premium payments are paid, they are counted as taxable gifts to the trust. The gift tax can be avoided if the life insurance trust is constructed as a Crummey or “present interest” trust. While a policy can save you thousands, if not millions, in taxes, the downside is that the insured person no longer owns the insurance policy; it is owned by the trust, and a trustee must be appointed. Once an irrevocable trust is in place, it cannot be altered and that makes it a risky decision.