If the beneficiary of your life insurance policy is someone other than your spouse, such as your children or other family member, your policy may be included in your taxable estate. If the total amount of your taxable estate is greater than the current state or federal estate tax exemption, your policy may be taxed. Your policy will not be taxed, however, if you transfer it to another individual or put it in a trust.
When you transfer a life insurance policy to another person, you lose ownership as well as control of the policy. Transferring the policy to a life insurance trust enables you to retain some control because the trust owns the policy and is the beneficiary. Therefore, you can designate the beneficiary of the trust. Keep in mind, however, that whichever transfer option you choose may be subject to a gift tax depending on the amount of the policy’s cash value. In addition, if you want to establish a life insurance trust that will exclude your policy from estate taxes, you must make sure it’s an irrevocable trust and you cannot act as trustee. Consult with your an elder law attorney to determine the right option for you.
