In last week's post we discussed what assets are included in one's estate under California law for estate planning - and estate tax - purposes. One of the assets we mentioned in that post is life insurance. If a person is the owner of a life insurance policy, the proceeds of that policy will be included in their taxable estate for federal estate tax purposes.
If the beneficiary of the policy is the policy owner's spouse, there will be no estate tax liability on the policy owner's death. Under the unlimited marital exemption, a person can pass any amount of property to their spouse when they die. But if the beneficiaries are anyone other than the spouse - such as the policy owner's children or grandchildren - the proceeds will be included in the owner's taxable estate.
Fortunately, there is an estate planning tool that can keep a life insurance policy out of one's estate for estate tax purposes. This tool is the irrevocable life insurance trust, or ILIT. When a life insurance policy owner creates an ILIT, they transfer ownership of the policy to the trustee, who holds the policy for the benefit of the beneficiaries. Because the person who took out the policy is no longer the owner, the policy is not included in their estate when they die.
One thing to keep in mind about an ILIT is that it is truly irrevocable. Once a policy is transferred to an ILIT the former owner can no longer amend the policy, change the beneficiary or otherwise have any control over it. An experienced estate planning attorney can assist anyone who is interested in setting up an ILIT.
Source: Elderlawanswers.com, "Make Sure Your Life Insurance Is Not Taxed at Your Death," accessed April 3, 2016