Can estate taxes be minimized for life insurance payouts?

On behalf of Scaringi Law posted in Estate Planning on Friday, July 17, 2015.

Readers may recall that payable-on-death contracts, such as life insurance policies, generally do not require probate before the assets transfer to the named beneficiaries. However, avoiding probate is not the same as avoiding estate taxes.

Specifically, any assets titled in a decedent's name might be counted toward his or her estate tax value, for purposes of determining estate tax liability. Although the federal exemption is high, states may impose their own estate taxes, such as the Pennsylvania inheritance tax. Since many individuals carry large life insurance policies, that particular asset might subject an estate to high taxes.

However, there are tax-saving strategies for this asset, such as an irrevocable life insurance trust. Since the trust is named as the owner of the policy, the purchaser no longer has control over this asset, nor will it be included in the value of his or her estate. However, several considerations attach to this type of trust.

One consideration is the implications to the named beneficiaries. If a lump sum payment is made to those beneficiaries, they may be ineligible to receive benefits under government programs like Medicaid. Similarly, a beneficiary's creditors, to the extent he or she was in debt, might seize any lump sum payment. However, just as a spendthrift trust can keep the principal of a trust away from the beneficiary and his or her creditors, so can an irrevocable life insurance trust be set up with conditions on policy distributions. Our law firm focuses on estate planning, so we are familiar with many sophisticated solutions to tax planning, asset protection and elder law needs.

Source: FindLaw, "The Irrevocable Life Insurance Trust," copyright 2015, Thomson Reuters