Instead of your spouse or partner being named as the beneficiary of your life insurance policy, you may choose to transfer the policy proceeds into a irrevocable life insurance trust account and name your partner as beneficiary of the trust.
Why would you want to do that?
When properly done, a life insurance trust allows you to designate what is done with the proceeds as well as what happens to the remainder of the trust funds when you pass away. Also, because the trust owns the policy, the policy is not considered part of the estate when you die and therefore, is not taxable as long as the policy transfers to the trust at least three years before your death. The policy will pass outside of your partner’s estate as well.
You can pay the policy premiums by annually gifting money to the trust. You can also increase the amount of the policy by transferring additional money to the trust, if you wish. One caveat to a trust owning your life insurance policy is that you cannot name yourself as the trustee of the trust. In doing so, the policy is counted toward estate assets, subject to estate taxes when you pass away. Another caveat is to carefully structure the cash or assets going into the trust to avoid gift taxes.
If you don’t have a life insurance policy at the outset, you can also create a trust and transfer assets to the trust and instruct the trustee to purchase a life insurance policy. If the trust applies for and takes out the life insurance policy initially, there is no three-year waiting period before the policy is out of your estate.
An estate planning attorney can help you plan your estate using irrevocable life insurance trusts should you desire to use this tool to avoid estate inheritance taxes and give your heirs the full benefits you wish them to receive.
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