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Avoiding Estate Taxes On A Death Benefit

Many people have been told that the death benefit of a life insurance policy is not taxable. While this is true with respect to income taxes (barring some exceptions), you may be surprised to learn that the death benefit of a life insurance policy is indeed subject to federal and state estate taxes. Yet these taxes, too, can be avoided.

If properly drafted, an irrevocable life insurance trust will permit you and your family to eliminate the estate tax consequences of life insurance. For decades, the attorneys at Quinlivan & Hughes, P.A., have assisted individuals throughout Minnesota in the establishment of irrevocable life insurance trusts, and have helped to safeguard their clients’ families from estate taxes.

What Is A Life Insurance Trust?

An irrevocable life insurance trust is a type of irrevocable trust that may own one or more policies insuring your life. In order to avoid estate taxes successfully, the trust must be drafted so that you do not have any “incidents of ownership” with respect to any policy insuring your life. That is, you cannot have any control over any decision concerning the life insurance policy or policies. Likewise, the cash value and death benefits of these policies cannot be used to pay any obligation or debt owed by you or your estate.

While you cannot receive any personal benefit from a policy owned by the trust, an irrevocable life insurance trust may provide financial protection for your spouse, children and grandchildren. Similarly, death benefits paid from your policy may be held in further trust for the benefit of your spouse and family without estate taxation.

How Does It Work?

An independent trustee may be given broad discretion to distribute principal from the trust. That discretion, in turn, allows the trustee to terminate the trust and distribute or dispose of the life insurance policies if your family’s financial circumstances have changed.

Unless you give one or more fully paid up policies to the trust, you must have a plan for the ongoing payment of premiums by the trustee. Most grantors choose to make annual gifts to their life insurance trusts that the trustee uses to pay annual premiums. If the life insurance trust includes certain provisions for withdrawal, all or a portion of your annual gifts to the trustee will qualify for gift tax annual exclusion treatment, provided that you and trustee comply with rules governing those gifts.

Guidance As You Establish Your Trust

With careful planning, drafting and execution, an irrevocable life insurance trust can provide a substantial financial and tax benefit to your family. For further information, contact Quinlivan & Hughes, P.A.‘s St. Cloud, Long Prairie, Monticello and Little Falls offices, by calling 320-200-4928 or arranging an appointment online.