Insurance

Insurance owned by you is considered part of your federal taxable estate if you control the "incidents" of ownership, especially the right to name the beneficiary. Although insurance proceeds payable to a surviving spouse qualify for the unlimited marital deduction, those proceeds will be subject to tax upon the surviving spouse's death. Therefore, you should consider either having children own policies of life insurance on you and your spouse, or creating an irrevocable insurance trust to hold the policies.

An insurance trust can be an important tool in building your estate and reducing estate taxes. Under this plan, an irrevocable trust is set up by you during your life. After the trust is in existence, the trust purchases an insurance policy on you life in an amount that will pay the estate tax that is estimated to become due upon your death. Because you will not own or control the insurance policy at your death, the policy proceeds will not be included in you taxable estate, but can be lent to your estate to pay the estate tax. If the trust is designed properly, you will be able to transfer a yearly sum to the trust equal to the insurance premium payable and have the trust use that gift to pay the insurance premiums. The trust can be given the power to lend proceeds of the insurance to your estate, so that your estate will have cash to pay the estate tax due.

One variation of this is for the trust to purchase what is known as a "joint and survivor" or "second to die" policy. Under such a policy, the benefit is paid when both lives have ended, that is when both spouses have died. Such policies are typically less expensive then purchasing two separate policies and less expensive then buying one policy written on one life.