Creating A Life Insurance Trust

(May 2000) -- People who purchase life insurance do so for a variety of reasons, believing that when they die, their families will be protected.

"The proceeds could be used to pay off the mortgage, provide income for the children during a dependency period and also pay for college education costs," said Franklyn Lohr, an Insurance Broker. "The money could also be invested to produce an income to the wife over an extended period of time."

While estate taxes aren't due until the passing of the second spouse, when all the assets are counted, adding life insurance benefits to the total could put the value of an estate over the $675,000 one-time estate tax exemption.

"People forget that life insurance can be part of your estate and therefore be subject to estate taxes and that could like take away as much as 55% percent of the benefits that you think are actually going to your family," said Gilda Borenstein from Merrill Lynch.

But by working with an estate planning attorney and setting up a life insurance trust, life insurance benefits can be shielded from estate taxes. The trust becomes both the owner and the beneficiary of the insurance policy.

"It is not part of their estate, so it is not subject to estate taxes. And that could either lower the estate taxes that are due on the estate or it could actually eliminate the estate taxes, depending on the person," Borenstein said. "What happens then is the trustee of the trust will then take the money in the trust and give the money to the people you really want it to go to in the first place."

Remember that old saying about not being able to avoid death and taxes? Well, with a proper estate planning and the creation of a life insurance trust, at least you might be able to avoid the taxes part.

Also see: Shaping up your financial future