If you own life insurance, you probably bought it to protect your family if something happens to you. But did you know that half of your life insurance proceeds could end up going to the U.S. Treasury, rather than to your heirs? The proceeds themselves will go to your beneficiaries. But the amount of the proceeds will be added to your estate for estate tax purposes. If you have enough assets to be subject to the estate tax, then roughly half the amount of the proceeds could be forfeited to the government in taxes – instead of going to protect your family. Wouldn’t you want to avoid this outcome if you could?
There is a way around this problem. It’s called an “irrevocable Life Insurance Trust,” or ILIT. The idea is to create a trust to hold your life insurance policy. You name the ILIT as the owner and beneficiary of the policy, and you name whomever you want to receive the proceeds as the beneficiaries of the ILIT. If it’s done right, the policy proceeds will go to the beneficiaries you select and not be included in your taxable estate.