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Do you own life insurance on your life or that of your spouse? If so, you could be in trouble, estate tax and probate wise, unless you take certain steps noted here. Life insurance owned individually is included in your estate for estate taxes and if paid to to the estate, could be subject to probate.
The key: Set up an irrevocable life insurance trust with your heirs as beneficiaries.
This technique works for both existing life policies as well as new policies. The problem is that if you can change beneficiaries or have other “incidents of ownership,” the full face value of the policy is included in your estate upon death. However, if it is owned by an irrevocable trust, you simply avoid this problem.
Tip: A properly structured trust could also keep the money from being dissipated by spendthrift children and their spouses or ex-spouses. Even better the insurance money could cover any other taxes including estate taxes
The trust must be irrevocable,which means that you can’t change your mind. You can’t be the trustee either,but you can appoint another relative or friend such as your brother or kids or even a bank. This gives your family control over the policy without the risks associated with direct ownership. The trust would then pay the premiums. In addition, the trust can be used as a form of asset protection against creditors and can be used to prevent spouses of your kids from getting the money if a divorce occurs.
Final word: Currently, there is a $5,000,000 exemption from estate tax that can be increased to $10,000,000 for married couples. However, this exemption is scheduled to be phased out after 2012. It is crucial , especially for wealthy folks to institute this action immediately. Don’t wait to pass go or procrastinate.