Berry Moorman

Estate Tax Savings Using Life Insurance Trusts

Estate Tax Savings Using Life Insurance Trusts

Estate Tax Savings Using Life Insurance Trusts –  reducing federal estate tax liability.

One of the most effective ways of reducing federal estate tax liability is through the use of an irrevocable life insurance trust. Unlike our former Michigan Inheritance tax, the Federal Estate Tax has always taxed life insurance proceeds. In the event, however, that the life insurance is transferred to an irrevocable life insurance trust, the insurance can be removed from the tax base. Because of the ease with which this asset may be removed, there is a three-year waiting period between the time that life insurance is transferred until the time it can be excluded from the federal taxable estate. If, instead of transferring existing insurance, new insurance is obtained by the irrevocable trust itself, then there is no three-year waiting period.

The transfer of an insurance policy to an irrevocable trust and any subsequent premium payments are deemed to be gifts to the trust beneficiaries. Certain technical requirements must be complied with in order to qualify the gifts for the individual’s $10,000 presentinterest exclusion. Special elections must also be made if the trust may be used for generation skipping purposes.