Life insurance is income tax free to the beneficiary, but if the insured owned the policy the full death benefit is included in the taxable estate, and a $5 million policy owned the wrong way can cost a family $2 million at a 40 percent rate. An irrevocable life insurance trust keeps the proceeds out. The trust owns the policy from the start, the insured makes annual gifts that the trustee uses for premiums, and at death the trust collects the proceeds and can lend to or buy assets from the estate so that nothing has to be sold to pay tax.
Two rules cause most of the mistakes. A policy transferred to the trust within three years of death is pulled back into the estate, so the trust should apply for a new policy or buy an existing one for value. And premium gifts qualify for the $19,000 annual exclusion only if the beneficiaries receive Crummey withdrawal notices each year. Even at a $15 million exemption the trust still matters for families above it, for families in states with their own estate tax, and for anyone who wants the proceeds controlled, protected from a beneficiary's creditors and leveraged with GST exemption.
The full piece is at turnipseed.law.
