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Estate Planning for Individuals and Families

Life insurance is present in almost every estate plan and serves as a source of support, education-expense coverage, liquidity to pay death taxes, pay expenses, and fund buy-sell agreements.

Tax implications of life insurance

Proceeds from life insurance that are received by the beneficiaries upon the death of the insured are generally income tax free.

There are three circumstances that cause life insurance to be included in the decedent's estate:

  1. The proceeds are paid to the executor of the estate
  2. The decedent at death possessed an "incident of ownership" in the policy
  3. There is a transfer of ownership within 3 years of death

An incident of ownership includes the right to assign, to terminate, to name beneficiaries, and to borrow against the cash reserves.

Two types of trust arrangements most used for life insurance:

1. Revocable Life Insurance Trust

In this arrangement the grantor names the trust as beneficiary of the life insurance policies, retaining the right to revoke the trust and other rights of ownership.  

2. Irrevocable Life Insurance Trust

The purpose of this arrangement is to exclude life insurance proceeds from the estate of the first spouse to die and from the estate of the surviving spouse.

The spouse may be the life income beneficiary but may not have any right to or power over trust principal except per the discretion of the trustees.