It is not uncommon for some New York residents who are planning their estates to forget to think about their life insurance policies. For some people, however, these policies, if included in their overall estate valuation, could subject the estate to significant estate tax liability.
People may avoid this issue by establishing an irrevocable life insurance trust to own their insurance policies. Since these trusts may not be changed by the grantor or revoked, they are not subject to tax liability upon his or her death. They are thus an effective means to reduce the size of the estate, thereby avoiding tax liability incurred due to the policy value.
There are a few other benefits of irrevocable life insurance trusts. Some people are unable to handle a sudden windfall, and a grantor may want to ensure their long term needs will be taken care of. A trust can provide money to the intended beneficiary over time rather than in one large lump sum. If a beneficiary is receiving federal disability benefits, such a trust may also be used in order to provide for their needs while not impacting their eligibility. In some cases, these trusts may protect the life insurance proceeds from creditors looking to collect their balances from the estate’s value.
Being careful when preparing wills and trusts is important. People should consider the value of all of their assets and then discuss the appropriate way to handle passing them to their intended beneficiaries with their estate planning lawyer. By using the correct tools, it is possible to avoid the potential tax liabilities and probate costs the person’s family might otherwise bear. Those costs and taxes are paid out of the estate itself, so they may greatly reduce the value of the estate before it passes on to the person’s beneficiaries.
Source: FindLaw, “The Irrevocable Life Insurance Trust”, accessed on Feb. 9, 2015