Estate Planning

Worried that a life insurance policy could push the total value of your estate over and above the exemption amount thereby creating a tax bill for your beneficiaries?

One way to minimize estate tax is to set up an irrevocable life insurance trust. By definition, an irrevocable trust is a trust that cannot be modified or terminated without the permission of the beneficiary.

Now you may be thinking that your estate could not possibly benefit from an irrevocable trust, but once you add the assessed value of your home to retirement savings plus your insurance policy, you may be surprised. Plus, tax efficiency is only one of the benefits. Trusts are designed to allow your estate to benefit your loved ones long after you are gone.

Once you have transferred an asset into the trust, you give up all rights of ownership to that asset. Besides life insurance policies, the types of assets that can be held in the trust include investments, cash, real estate and other valuable assets.

What this effectively does is remove that asset — for instance, your life insurance policy — from your taxable estate. This prevents a large life insurance policy from triggering estate tax problems. Because you no longer own the asset, you also cannot be taxed on the income generated by the asset.

An irrevocable trust is a complex estate planning tool, and setting it up often requires professional help from a lawyer and a financial planner. Failure to follow the required formalities of setting up a trust fund could result in the IRS asserting unfavorable gift, estate, generation-skipping transfer or income tax on the asset.

You don’t have to be ultra-wealthy to benefit from a trust. If you have a net worth of $100,000 and have a significant portion of your assets in a business or real estate, you may want to consider creating a trust.

Consult with your professional team to ensure that your estate is being reviewed for the terms that you want to protect your family.