If you have a life insurance policy, chances are you feel secure that your loved ones will be provided for when you are gone. But, it is important to know that life insurance policies can have unintended negative consequences. You need to make sure that your loved ones will actually receive the cash benefit for your policy and that it won’t be eaten up by taxes and fees.
Life insurance is subject to tax as part of your estate at death if (1) during life you retained control over the policy (i.e. could amend, change beneficiaries, borrow against policy, etc.); or (2) if the policy pays out directly to your estate. Note if your policy pays to your spouse, the proceeds wont be taxed as part of your estate; but, they will likely be taxed as part of your spouse’s estate.
If you are concerned the the estate tax could impact you, consider creating an Irrevocable Life Insurance Trust (ILIT). An ILIT is a type of trust that can hold, own and benefit from Life Insurance policies – since it is owned by the trust, the proceeds are not considered part of anyone’s taxable estate. If the money flows to your spouse, then your spouse doesn’t have to worry about the proceeds being part of his/her taxable estate. Instead, the money will flow thru – first being utilized by your spouse and then by children and/or other loved ones when your spouse passes on.
Contact us today to discuss whether preparing an ILIT is the right choice for you.