How does a life insurance policy affect my estate planning?
An individual may take out a life insurance policy for many reasons. For example, a young mother or father may want to have a life insurance policy so that their children have means of support should they die before the child is self-supporting.
Life insurance is non-probate property. This means that upon the death of the individual who is insured, the proceeds will be directed to the beneficiary listed on the policy. The policy beneficiary can be an estate, a trust, or an individual.
Typically, a life insurance policy is taken out by the individual whose life is insured. Under these circumstances, the value of the insurance proceeds will be included in the policy owner’s gross estate for tax purposes. Thus, if you have a large life insurance policy, you may want your estate plan to incorporate tax planning tools to minimize taxes levied at your death.
If your estate is very large, you may want to place your life insurance policies in an irrevocable life insurance trust (ILIT). In so doing, the trust becomes the owner of the life insurance policy and the proceeds are excluded from your gross estate for tax purposes. This is a helpful maneuver if you need to move wealth outside your estate in order to reduce your federal and state estate tax exposure.
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